SUSTAINABILITY RISK ENTERPRISE MANAGEMENT (SREM) IN INDONESIA:FRAMEWORK DEVELOPMENT AND SECTORAL ANALYSIS DISSERTATION In partial fulfilment of the requirements for the Degree of Doctor of Philosophy from Institut Teknologi Bandung By SITA DELIYANA FIRMIALY Student ID: 39016015 (Doctoral Program of Science in Management) INSTITUT TEKNOLOGI BANDUNG BANDUNG, INDONESIA February 2020 i ABSTRACT SUSTAINABILITY RISK ENTERPRISE MANAGEMENT (SREM) IN INDONESIA: FRAMEWORK DEVELOPMENT AND SECTORAL ANALYSIS By Sita Deliyana Firmialy Student ID: 39016015 (Doctoral Program of Science in Management) This study will focus on designing a comprehensive framework to measure sustainability risk of companies, specifically within the Indonesian context. Sustainability Risk in this study defines as the level of risk as threat that might deter companies ability to sustain. A higher degree of companies sustainability risk is in par with a higher degree of the company to become unsustained, and therefore it is not suitable for the business or company itself. Therefore, sustainability risk in this study remains position as the negative aspect that able to threat companies survivability. In this context, our definition aligns with the traditional view of risk, that viewed the risk as a threat. Companies’ sustainability covered two dimensions, namely, financial and non-financial aspects. However, in this study, we limit the study to focus on maintaining companies’ sustainability financially. The obtained framework will have the ability to asses the Sustainability Risk (SRISK) performance at the corporate level, specifically strategic, operational and business unit level. Multi-method analysis performed to explore the SRISK practices differ within non-financial sectors in Indonesia. This current study also will explore the possibilities of different SRISK practices between two classes of categories, namely SRISK within the controversial sector and non-controversial sector. The categorization is build given to their differences in characteristics, starting from their ownership structures, primary funding sources, their governance system and business operating process. The final framework to measure SRISK Score for each sector will consist of combination from various risk management guidelines and social rating frameworks developed by rating agencies and academics. Multiple stages of analysis combining qualitative and quantitative methodology (i.e. Thematic content analysis, Hierarchical regression, Least Squares Regression) conducted to analyze the data obtained and then validate the resulted framework statistically. In the last stage, a quantitative pilot test conducted to examine the implementation of proposed SRISK models further. ii The research context in Indonesia, so there might be limitations when applying the results to other cultural and other geographical settings. In this dissertation thesis, we offer a useful source of information about the practical implementation of SRISK within each sector in Indonesia Stock Exchange (IDX). We focused on our analysis on Non-Financial Reporting, and we exclude the Financial Sector due to its differences in the governance system and types of regulations that controlled it. We also evaluate the practical implementation of Controversial Industries and Non-Controversial Industries. Our last contribution will focus on identifying the types of SRISK that faced each sector, as well as identify their determinants. Much of the literature within the field of practical implementation of Sustainability was focusing on Corporate Social Responsibility (CSR) and viewed CSR as philanthropic activities and political CSR. In this study, we will take a different approach, as we focused on the risk management perspectives of Sustainability to defines the SRISK. Our study confirmed the statistically significant relationship between sustainability risk and financial performance. In this study, we also found valid evidence of major key determinant influences of firm size, Board size, leverage, ownership structure, number of a female director on Board to companies sustainability risk. This dissertation brings information by providing recommendations to build an optimal SRISK strategy for Indonesian companies. Final results from this dissertation may also provide a significant suggestion for policymakers, and contribute to Indonesian’ Sustainability Law. Keywords: Sustainability Risk, Sustainability, Risk management, Risk Factor, Financial Performance iii ABSTRAK MANAJEMEN RISIKO KEBERLANJUTAN PERUSAHAAN (SREM) DI INDONESIA: PEMBENTUKAN KERANGKA KERJA INTEGRATIF DAN ANALISIS SEKTOR Oleh Sita Deliyana Firmialy NIM: 39016015 (Program Studi Doktor Sains Manajemen) Studi ini bertujuan untuk merancang kerangka kerja yang komprehensif untuk mengukur risiko keberlanjutan perusahaan, khususnya dalam konteks Indonesia. Risiko keberlanjutan dalam penelitian ini didefinisikan sebagai risiko yang dihadapi perusahaan yang dapat menghalangi posisinya untuk mencapai keberlanjutan. Oleh karena itu, risiko keberlanjutan dalam penelitian ini dapat dipandang sebagai aspek negatif yang dapat mengancam kelangsungan hidup perusahaan. Dalam konteks ini, definisi kami selaras dengan pandangan tradisional tentang risiko, yang memandang risiko sebagai ancaman, alih-alih ketidakpastian atau peluang. Keberlanjutan perusahaan mencakup dua dimensi, aspek finansial dan non-finansial. Namun, dalam penelitian ini, kami membatasi penelitian untuk fokus pada menjaga keberlanjutan perusahaan secara finansial. Kerangka kerja yang diperoleh akan memiliki kemampuan untuk menilai kinerja Risiko Keberlanjutan (SRISK) di tingkat perusahaan, khususnya tingkat strategis, operasional dan unit bisnis. Analisis metode campuran akan dilakukan untuk mengeksplorasi perbedaan praktik SRISK dalam sektor non-keuangan di Indonesia. Studi saat ini juga akan mengeksplorasi kemungkinan praktik SRISK yang berbeda antara dua kelas kategori, yaitu SRISK dalam sektor kontroversial dan sektor non-kontroversial. Pengkategorian dibangun berdasarkan karakteristiknya yang berbeda, mulai dari struktur kepemilikan, sumber pendanaan dasar, sistem tata kelola, dan proses operasi bisnis mereka. Kerangka kerja akhir untuk mengukur Skor SRISK untuk setiap sektor akan terdiri dari kombinasi dari berbagai pedoman manajemen risiko dan kerangka kerja peringkat sosial yang dikembangkan oleh lembaga pemeringkat dan akademisi. Beberapa tahap analisis menggabungkan metodologi kualitatif dan kuantitatif (yaitu analisis konten Tematik, Least Squares Regression) akan dilakukan untuk menganalisis data yang diperoleh dan kemudian memvalidasi kerangka yang dihasilkan secara statistik. Pada tahap terakhir, uji coba akan dilakukan untuk memeriksa lebih lanjut penerapan model SRISK yang diusulkan. iv Konteks penelitian di Indonesia, jadi mungkin ada batasan ketika menerapkan hasil ke pengaturan budaya dan geografis lainnya. Dalam tesis disertasi ini, kami menawarkan sumber informasi yang berguna tentang implementasi praktis SRISK dalam setiap sektor di Bursa Efek Indonesia (BEI). Kami memfokuskan analisis kami pada Pelaporan Non-Keuangan dan kami mengecualikan Sektor Keuangan karena perbedaannya dalam sistem tata kelola dan jenis peraturan yang mengendalikannya. Kami juga mengevaluasi implementasi praktis Industri Kontroversial dan Industri Non-Kontroversi. Kontribusi terakhir kami akan fokus pada mengidentifikasi jenis-jenis SRISK yang dihadapi setiap sektor, serta mengidentifikasi faktor-faktor penentu mereka. Banyak literatur dalam bidang implementasi praktis Keberlanjutan berfokus pada Corporate Social Responsibility (CSR) dan memandang CSR sebagai kegiatan filantropis dan / atau CSR politik. Dalam studi ini, kami akan mengambil pendekatan yang berbeda, karena kami fokus pada perspektif manajemen risiko Keberlanjutan untuk mendefinisikan SRISK. Hasil utama dalam penelitian kami mengkonfirmasi hubungan signifikan antara risiko keberlanjutan dan performa finansial perusahaan. Pada penelitian ini, kami menemukan pula bukti valid dari ukuran perusahaan, struktur perusahaan, jumlah direktur perusahaan, jumlah direktur wanita, dan rasio jumlah hutang dan modal perusahaan sebagai kunci determinan utama dari risiko keberlanjutan perusahaan. Disertasi ini membawa lebih banyak informasi dengan memberikan rekomendasi untuk membangun strategi SRISK yang optimal bagi perusahaan Indonesia. Hasil akhir dari disertasi ini juga dapat memberikan saran yang signifikan bagi para pembuat kebijakan, dan berkontribusi pada Hukum Keberlanjutan Indonesia. Keywords: Risiko Keberlanjutan, Keberlanjutan, Manajemen Risiko, Faktor Risiko, Kinerja Keuangan v SUSTAINABILITY RISK ENTERPRISE MANAGEMENT (SREM) IN INDONESIA : FRAMEWORK DEVELOPMENT AND SECTORAL ANALYSIS HALAMAN PENGESAHAN By Sita Deliyana Firmialy Student ID: 39016015 Doctoral Program of Science in Management Institut Teknologi Bandung Approved Promotor Team Date………… Promotor Co-Promotor ________________ _________________ (Prof.Dr.Ir Sudarso Kaderi Wiryono, DEA) (Dr. Yunieta Anny Nainggolan) vi THE GUIDANCE FOR USING THE DISSERTATION Unpublished doctoral dissertation is registered and available in the Library of Bandung Institute of Technology, and is open for public, provided that the author owns the copyright in accordance with the intellectual property rights that are applicable in the Library of Institut Teknologi Bandung. Bibliographical references are allowed to be use in a limited manner, however the citation and summarization can only be proceed upon the author’s permission and must include the scientific norm of stating this dissertation as the source. This dissertation has to be cited as: Firmialy, Sita Deliyana. (2019): Sustainability Risk in Indonesia, Framework Development and Sectoral Analysis, Doctoral Dissertation, Institut Teknologi Bandung. Reproduction or publication of parts or whole of the dissertation must be under the consent of the Dean of Post-Graduate School, Bandung Institute of Technology. vii This dissertation is dedicated to my mom, my little sister, my little brother and all of my beloved family who always support me viii STATEMENT OF AUTHORSHIP I hereby declare that I am the sole author of this thesis and to the best of my knowledge and belief, the thesis contains no material previously published or written by another person except where due reference is made. I further declare that this thesis has not been previously submitted to obtain a degree at this or any other higher education institution. Signature: Place, Date: 5 February 2020 ix ACKNOWLEDGEMENTS I want to say my greatest appreciations to my promotor, Prof. Dr Ir. Sudarso Kaderi Wiryono for his brilliant and excellent guidances. I am very grateful to be able to earn his guidances in all these three years during my time in SBM-ITB. There are no words that I can say to him, other than thank you very much Prof. for everything you gave me in all these years. Secondly, I would like to say my gratitude to my Second Promotor, Yunieta Anny Nainggolan, PhD. Thank you for all the guidance all this time, since I was still on my master degree till now, I finished my dissertation. Thank you for your trust in me, Mrs Neta, in all these years, you made me the one I am now. Thank you very much. I really could not make it to this level without the support and guidance of my First and Second Promotor. I want to thank all lecturers in SBM for their support, especially Pak Akbar, Ibu Maya, Pak Hari Mukti and Pak Anggoro. They always support me when I felt down and provide me with a lot of insight on how to survive the next day. My friends and frequent co-author, Prameshwara Anggahegari, Ade Muhammad, Reno Renaldi, Sinta Ariyani, Ruspita Rani, Christina Wirawan, Hesti Maheswari, and Muslim El-Hakim, thank you for always been a great supporter for me. My best friend, Devi Arnita and Eva Oktarina, thank you for providing helpful advice on my research over the years. My brother Indra with his wife Icha and his daughter Kemala, my beautiful niece, thank you for always being there to support me. Thank you for help me take care of our precious diamond, Mom and our little sister, Anna Destriana. I want to say thank you to Ica’s family, Aki Ahmad and Jidang Elita, Petri and Gilang with Mahira and Maha, Vidi and Aga with their three precious beautiful daughters, thank you for always supporting me in my study, I really can’t thank you enough. My two most important person, my Mom, with her incredible strategy to strive through life. She is my precious, and she is the one who always teaches me, to views problem comprehensively and tackles it efficiently. My little sister, my angel, Anna Destriana, she is the one that taught me how to become a patient person and x always questions everything in life. Thank you for always accompany me all this time and support me through all this journey. I want to say thank you to My Dad with his incredibly insightful way of viewing life. Thank you for teaching me to think out of the box and for being courageous enough to take a risk in life. I want to say special thank you for my grandparents, all this time since I am a kid till now, they never stop to support me, without them I would likely not be at this point today. I miss you, Grandma, and for you, I dedicate my thesis. For my Ato, Colonel Datuk Amri Samsura (deceased) and my beautiful grandma, Hj. Saadah Anas (deceased) and Hj. Nurmala Samsura (deceased), thank you for your protection for me and my family, my Ato, Anas Sanusi, BA., my relatives Prof. Dr. H. As'ari Djohar, M. Pd., and Mokhamad Anwar, SE., MSi, Ph.D., and all my family, i really am grateful for all your support all this time till finally i have made it into this far. Honestly if i may say, this journey is indeed very tiring, however it is very interesting. Now after i finished my thesis, it is not the end, but it is a start of something new for me, something much more interesting for me to look upon and search into. Last but not least, I would like to say my gratitudes to Suryo Utomo, MSM. (deceased), thank you for being my good friend Mas Uyo. I am sorry for not being able to keep our promise to meet and chat before. I am sorry for not being able to be with you as your friend and listen to you before you left Mas, however you are always in my heart Mas Uyo, thank you for everything Mas and i wish you an eternal happiness aside Allah SWT. May Allah SWT provide huge seat filled with happiness for My precious Ato and Nenek with Mas Uyo, aside Allah SWT in heaven. I want to say thank you for all my other family and colleague for all the support till now. I really cannot say enough to express my gratitude for you all.