Carbon risk and corporate financial resilience in Indonesia

Abstract

Empirical evidence linking carbon risk to corporate financial resilience largely comes from developed markets, leaving this relationship unexamined in emerging economies with still-developing carbon-regulatory regimes such as Indonesia’s. This study addresses that gap, examining whether and through which mechanisms carbon exposure shapes financial resilience when disclosure and carbon pricing remain incomplete. The contribution is conceptual: explaining how carbon exposure becomes financial vulnerability through transition-cost, financing, governance, and stakeholder-legitimacy mechanisms, rather than treating the Indonesian context as the source of novelty. The argument is tested on nonfinancial firms listed on the Indonesia Stock Exchange from 2021–2024, using panel data regression across 857 firm-year observations; financial resilience is captured via the Altman Z-score, and carbon risk through emission intensity relative to revenue. Findings show a significant negative association between carbon risk and financial resilience (β = -0.0365, p = 0.0492), along with significant associations for profitability (β = -5.5433, p = 0.0000) and leverage (β = -0.3339, p = 0.0000); the model explains 24 percent of the variation (adjusted R² = 0.2372). The study integrates Transition Risk, Agency, and Stakeholder/Legitimacy Theory into a single framework explaining why carbon exposure weakens financial resilience absent mandatory disclosure. These results underscore embedding environmental considerations into corporate financial strategy and risk management as emerging economies develop their sustainability regulations.