Identification of Environmental, Social, and Governance Risks and Their Impact on the Banking Sector Through Internal Audit

Abstract

The implementation of the Environment, Social, and Governance (ESG) framework in the banking sector is a crucial element in supporting economic stability and sustainable development. This study aims to analyze in depth the role of internal audit in the process of identifying environmental, social, and governance risks in the Indonesian banking industry. This study applies a qualitative approach with an exploratory and descriptive case study design. Data collection focuses on the analysis of secondary documents, specifically sustainability index reports from independent data research institutions, which are interpreted through deductive reasoning and data triangulation based on an interpretive paradigm to understand the complex institutional context. The results demonstrate that the domestic banking sector faces multidimensional sustainability risks, characterized by substantial performance gaps between large banks and medium- and small-scale banks. The internal audit function plays a strategic role in verifying reporting accuracy, preventing environmental image manipulation practices, and ensuring compliance with sustainable banking regulations. However, the effectiveness of this function is hampered by structural limitations that include a deficit in auditor technical competence in the environmental dimension, limited financial resource allocation, and a lack of comprehensive supervisory support from the board of commissioners. Conclusively, a single internal audit function is inadequate to ensure the full integration of sustainability frameworks in the banking sector. Therefore, this study highlights the urgency of implementing a combined assurance approach that synergizes the roles of internal oversight, external oversight, and strategic management to strengthen the accountability of banking sustainability reporting holistically and collaboratively.

Keywords: Environment, Governance, Internal Audits, Risk Managements, Social