The Influence of Regulation and Tax Incentives on ESG Implementation in Financial Reporting of MSMEs in West Java, Indonesia

Abstract

This study aims to examine the influence of regulation and tax incentives on the implementation of Environmental, Social, and Governance (ESG) principles in the financial reporting of Micro, Small, and Medium Enterprises (MSMEs) in West Java, Indonesia. As global business practices shift toward sustainability, MSMEs face substantial challenges in adopting ESG frameworks due to limited knowledge, financial constraints, and fragmented policy support. Using a quantitative approach and survey method involving 100 qualified MSMEs, the findings reveal that both ESG regulation and tax incentives significantly affect ESG implementation. Multiple linear regression analysis shows that ESG regulations, tax incentives, as well as the perceived challenges and opportunities of ESG, collectively contribute to the extent to which ESG is integrated into MSMEs’ financial reports. These insights provide valuable input for policymakers to develop more inclusive regulations and strategic incentives to support MSMEs in transitioning toward sustainable business practices.This study aims to examine the influence of regulation and tax incentives on the implementation of Environmental, Social, and Governance (ESG) principles in the financial reporting of Micro, Small, and Medium Enterprises (MSMEs) in West Java, Indonesia. As global business practices shift toward sustainability, MSMEs face substantial challenges in adopting ESG frameworks due to limited knowledge, financial constraints, and fragmented policy support. Using a quantitative approach and survey method involving 100 qualified MSMEs, the findings reveal that both ESG regulation and tax incentives significantly affect ESG implementation. Multiple linear regression analysis shows that ESG regulations, tax incentives, as well as the perceived challenges and opportunities of ESG, collectively contribute to the extent to which ESG is integrated into MSMEs’ financial reports. These insights provide valuable input for policymakers to develop more inclusive regulations and strategic incentives to support MSMEs in transitioning toward sustainable business practices.