THE EFFECT OF ESG, FREE CASH FLOW, AND CORPORATE GOVERNANCE ON FINANCIAL DISTRESS

Abstract

Objective- This study aims to analyze the influence of Environmental, Social, and Governance (ESG), Free Cash Flow, and Corporate Governance on Financial Distress in non-cyclical consumer sector companies listed on the Indonesia Stock Exchange for the 2022–2024 period. Financial distress is a condition in which a company experiences a decline in its financial health and difficulty meeting its financial obligations, which can be an early indication of bankruptcy. In recent years, ESG implementation, the ability to generate free cash flow, and good corporate governance have become important concerns because they are considered capable of supporting a company's stability and long-term sustainability. This study employed a quantitative method with a panel data approach. Purposive sampling was employed to select 93 companies with a total of 279 observations. The research data consisted of secondary data obtained from annual reports and company sustainability reports. Financial distress was measured using the Altman Z Score model, and ESG was measured using the Sustainability Report Disclosure Index (SRDI) in accordance with the 2021 GRI Standards. Free cash flow was calculated using operational cash flow and capital expenditures, while corporate governance was measured using 15 corporate governance indicators. Data analysis was performed using E-Views 12 software. The results of the study show that ESG, free cash flow, and corporate governance do not have a significant
effect on financial distress.
Findings- This shows that the level of ESG disclosure, the company's ability to generate free cash flow, and the implementation of corporate governance have not been able to optimally reduce the risk of financial distress in non-cyclical consumer sector companies.
Limitations- This research is limited to a research scope that only covers one company sector, and the use of independent variables are still limited.
Originality-This study examines the factors that influence ESG, Free Cash Flow, and Corporate Governance in finding evidence of whether there is a risk of Financial Distress.