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ESG Score and Firm Performance: Evidence from Indian–Listed Firms

Article in South Asian Journal of Management · February 2024

DOI: 10.62206/sajm.30.4.2023.56-80

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 SOUTH ASIAN JOURNAL OF MANAGEMENT

ESG Score and Firm Performance:

Evidence from Indian–Listed Firms

Rajat Deb*, Anita Behra** and Karkaria Dusmanta***

Focusing on Environmental, Social, and Governance (ESG) issues has emerged as a move
towards long-term sustainability by companies aspiring to bring about positive societal change
along with profit-making. There is a tendency among firms now a days to adopt ESG-
oriented policies to show their commitment to sustainable development. The general finding
of the extant literature on this is that ESG improves Firm Performance (FP), although there
are a few studies that report mixed and inconclusive results varying with FP-criteria, the
country where the research is carried out, and the periods of observation. The present study
aims to investigate the relationship between ESG scores and the FP of Indian-listed firms.
Adopting a longitudinal research design and accessing secondary data for thirteen years from
2009-10 to 2021-22, we chose 585 firms listed in the Nifty100 Index. Applying panel data
regression, this study has observed a significant negative impact of ESG on FP measured by
Return on Assets (ROA) and Return on Equity (ROE), which supports the Trade-off
theory; however, when the performance measure was changed to Tobin’s Q (the ratio of the
firm’s market value to its book value), the relationship was positive and significant which
supports the Stakeholder theory. The paper concludes with the acknowledgement of limitations,
discussions on policy implications, and suggestions for future research.
Key Words: ESG, Firm performance, Inferential statistics, Nifty 100 Index, Stakeholder
theory, Trade-off theory

1. INTRODUCTION
Focusing on Environmental, Social, and Governance (ESG) issues has emerged as a
move towards long-term sustainability by companies aspiring to bring about positive
societal change and profit-making. There is a tendency among firms nowadays to
* Assistant Professor, Department of Commerce, Tripura University, Suryamaninagar-799022, West Tripura,
Tripura, India; and is the corresponding author. E-mail: debrajat3@[Link]
** Ph.D., Scholar, Department of Commerce, Tripura University, Suryamaninagar-799022, West Tripura, Tripura,
India. E-mail: anitabehra9909@[Link]
*** Ph.D., Scholar, Department of Banking Technology, School of Management, Pondicherry University,
Puducherry-605014, India; and is the corresponding author. E-mail: dus91k@[Link]

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adopt ESG-oriented policies to show their commitment to sustainable development.

ESG has commenced as a sustainable move, but firms are currently using ESG as a
sustainable strategy to attract stakeholders and build reputations. Research has shown
that firms with good ESG performance have lower business risk, and a good reputation,
which ultimately creates a brand image (Garcia and Orsato, 2020). ESG score is an
aggregation of environmental, social, and governance factors, which allows investors
to select appropriate sustainable investment opportunities. To assess the ESG activities
of firms, different rating providers like Bloomberg and S&P Global design ESG scores
considering several quantitative and qualitative measurement criteria. Firms’ rapid
use of ESG as a sustainable strategy has caused a fundamental change in organizational
theory and business models (Xie, Nozawa, Yagi, Fujii and Managi, 2019; Bhanot, Rao
and Deshmukh, 2019). ESG scores are used as a criterion to assess public and private
firms’ sustainable initiatives, which affect the firms’ overall performance (D’Amato,
D'Ecclesia and Levantesi, 2021). Firms publishing sustainability reports have increased
globally. Investors are not necessarily attracted to the firms’ profit but tend to reward
firms with better sustainable strategies and penalize firms with poor sustainable
performance (Lourenço, Branco, Curto and Eugénio, 2012). For years, firms have
focused explicitly on financial performance. Before making investments in any firm,
investors traditionally focused solely on one factor: profit. Hence, firms have focused
on earning profits in order to attract potential investors. Neo-classical economics
believes that the key objective of any firm is profit maximization, and shareholders are
the key stakeholders (Eccles, Ioannou and Serafeim, 2014). Accordingly, firms focused
only on satisfying the shareholders, which would positively impact the Firms’
Performance (FP). Notably, satisfying stakeholders other than the shareholders would
impact the FP negatively (Brown and Caylor, 2006).
The literature examines the relationship between ESG and FP in order to identify
the potential growth opportunities of firms that may arise from the adoption of sustainable
practices. However, the findings of these studies yield a diverse range of outcomes,
leading to inconclusive conclusions. A study on China-listed firms has shown a
significant positive relationship between ESG and FP (Zhou, Liu and Luo, 2022). In
contrast, a study on American multinationals has reported that superior ESG scores
negatively impact FP (Duque-Grisales and Aguilera-Caracuel, 2021). Studies also
demonstrate no significant relationship (see Buallay, 2021). Research on Indian firms
has shown a mixed relationship between ESG and FP (Hasan, Singh and Kashiramka,
2021). However, it is important to note that the relationship between ESG and FP
varies among developed and developing economies. Most prior studies in developed
economies have shown a positive relationship with FP, while studies confined to
developing economy contexts have documented a negative relationship with FP (Garcia
and Orsato, 2020; Guruprasad, Bansal and Marudhappan, 2022). Firms in developing
economies have focused more on financial performance efficiency and profit-making
vis-a-vis non-financial performance, such as ESG (Yoon, Lee and Byun, 2018). The
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findings also vary with the different variables that are used to assess the relationship
between ESG and FP (Wu, 2006). Using Return on Assets (ROA) as an indicator of
FP, Australian firms have shown a positive impact (Gholami, Sands and Rahman,
2022), while multinationals in Latin America have shown a negative impact (Duque-
Grisales and Aguilera-Caracuel, 2021). French firms have shown a positive impact,
considering Tobin’s Q (the ratio of the firm’s market value to its book value) as an
indicator of firms’ market value performance (Boulhaga, Bouri, Elamer and Ibrahim,
2022), while the worldwide airline industry has shown a negative impact (Abdi, Li
and Càmara-Turull 2022). Consequently, the relationship between ESG and FP exhibits
variability when assessed using market-based and accounting variables. To address
the challenges associated with measurement, previous research has commonly
integrated both market-based and accounting indicators.
The literature demonstrates inconclusive results on the impact of ESG on FP. The
conflicting results suggest that the influence of ESG on FP varies across countries,
industries, variables, and observation periods. Studies with long-term observation
periods, i.e., more than five years, mostly find a positive impact of ESG on FP (Li,
Gong, Zhang and Koh, 2018). Research on the European listed firms for 15 years has
reported a positive impact on FP (Zaiane and Ellouze, 2022), and that of Italian-listed
firms for ten years affirms the trends (Carnini Pulino, Ciaburri, Magnanelli and Nasta,
2022). Studies with short-term observation periods, i.e., less than five years, report
either no significant or negative impact of ESG on FP (Jyoti and Khanna, 2021). For
example, a three-year study of Malaysian firms reports no significant relationship
between ESG and the firms’ profitability (Atan, Alam, Said and Zamri, 2018). Research
on the Indian-listed service sector firms concludes a negative impact of sustainable
performance on FP, considering data from six years (Jyoti and Khanna, 2021). Previous
study on Indian-listed firms over a five-year observation period has also reported a
negative impact of ESG on FP (Sharma, Bhattacharya and Thukral, 2019). Following
the trends, studies on multinational firms’ data covering a five-year timeline also
indicate a negative impact (Duque-Grisales and Aguilera-Caracuel, 2021). The
empirical findings on Chinese-listed firms also document a negative impact of ESG
and FP, considering five-year observations conclude that high early costs incurred in
implementation gradually weakened over time (Ruan and Liu, 2021). A study in
Malaysia has painted no significant impact of ESG on FP with an observation period of
three years with the explanation that a short period of three years will not be able to
depict a significant result (Atan, Alam, Said and Zamri, 2018). Further, the literature
indicates that sustainability and FP show significant empirical results with more
extended observation periods, not shorter ones (Eccles, Ioannou and Serafeim, 2014).
The study contributes to the existing literature in different dimensions: First, it
reports the impact of ESG on FP, considering an extended observation period. Most
studies in the Indian context have considered short observation periods and concluded

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with significant mixed empirical impacts. Adopting certain non-financial practices

requires time and a considerable cost for the firms initially, which may not depict an
accurate picture during the initial adoption period. Second, to measure FP, accounting
and market-based indicators are incorporated into the study to overcome the
disadvantages of the indicators. Third, prior studies addressing the linkage between
ESG and FP are primarily from developed economies like Malaysia, France, the UK,
and Australia. The present study covers the firms listed in India, one of the fastest-
growing economies and the first country to legislate Corporate Social Responsibility
statutorily. Fourth, prior studies have mainly used static Panel data regression; the
present study applies robust Panel data regression to control the existence and effect
of outliers. Finally, studies conducted previously in the Indian context have taken
into account ESG scores before the Covid-19 pandemic period; albeit the present
study considers the ESG scores of firms covering the Covid-19 pandemic period.
The study aims to investigate the impact of ESG on the FP of Indian firms listed in
the Nifty-100 index for an observation period of thirteen years.
The remainder of the study consists of five subdivisions. The second division presents
the related literature and hypotheses. The third division outlines the theoretical
underpinnings, while the fourth discusses the adopted research methodology. The
fifth division presents the empirical findings, followed by a discussion of the findings
in the sixth division and a summary of the study’s findings in the seventh division.

2. REVIEW OF LITERATURE AND HYPOTHESES

2.1 ESG SCORE
The increasing attention by stakeholders toward sustainable practices has attained
an academic focus on ESG. ESG has a broader acceptance as a metric that addresses
sustainable practices in three parameters, i.e., environmental, social, and governance.
‘Environmental’ refers to activities that directly or indirectly affect the environment
due to a firm’s operations. ‘Social’ refers to the relationship of a firm’s activities with its
various stakeholders. ‘Governance’ refers to the accountability of the people in the
organization. The ESG score is the combined numerical value based on the FP on the
three parameters of ESG. The score reflects the sustainability practices adopted by
the firms, which are used by different stakeholders to assess the FP on sustainability.
Various rating agencies across the globe adopt their unique methodology that evaluates
and assigns scores based on multiple criteria. For example, MSCI ratings compute
ESG scores across three pillars comprising ten themes across 33 critical issues based on
a seven-point scale rating from AAA to CCC. Thomson-Eikon ESG score ranges from
0 to 100, computed across 18 categories. The present study uses ESG scores from the
Bloomberg database widely used in literature (Buallay, 2021; Sachin and Rajesh, 2022).
The ESG score varies from 0.1 (lowest) to 100 (highest) provided by Bloomberg, which

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relies on 800 different metrics comprising the components of ESG. The score is
determined based on the information disclosed in the annual reports, CSR reports,
websites, and other information available through direct communication (Huber,
Comstock, Polk and Wardwell, 2017).
2.2 FIRM PERFORMANCE INDICATORS
Prior literature reports apply the following accounting and market-based indicators to
investigate the impact of ESG scores on FP: Earnings Before Interest and Tax (EBIT)
(Carnini Pulino, Ciaburri, Magnanelli and Nasta, 2022), Return on Capital Employed
(ROCE) (Jyoti and Khanna, 2021), ROA (Duque-Grisales and Aguilera-Caracuel,
2021), Return on Equity (ROE) (Zaiane and Ellouze, 2022), Tobin’s Q (Zhou, Liu and
Luo, 2022). Table 1 indicates that most studies have used accounting-based indicators
such as ROA and ROE and market-based indicators such as Tobin’s Q, concluding
varying findings, i.e., positive, negative, no significance, and mixed. A study examining
the association between sustainability reporting and FP across 20 countries in 342
financial institutions concluded mixed findings, i.e., positive with Tobin’s Q and
negative with ROA and ROE (Buallay, 2019). Multinationals in Latin America found
a negative linkage between FP and superior ESG scores, taking ROA as an FP indicator
(Duque-Grisales and Aguilera-Caracuel, 2021). Studies concluding similar findings
incorporating different FP indicators are Free Cash Flow (DCF) (Garcia and Orsato,
2020), ROCE (Jyoti and Khanna, 2021), and Tobin’s Q (Ruan and Liu, 2021). European

Table 1: Summary of Studies Proxied FP Indicators

Authors FP Indicators Findings
Buallay, 2019 ROA, ROE, Tobin’s Q Mixed
Garcia and Orsato, 2020 ROA, DCF Negative
Qureshi, Kirkerud, Theresa and Firm Value Positive
Ahsan, 2020
Buallay, 2021 ROA, ROE, Tobin’s Q No significant
Duque-Grisales and ROA Negative
Aguilera-Caracuel, 2021
Jyoti and Khanna, 2021 ROA, Return on Capital Negative
Employed (ROCE)
Ruan and Liu, 2021 Tobin’s Q Negative
Carnini Pulino, Ciaburri, EBIT Positive
Magnanelli and Nasta, 2022
Sachin and Rajesh, 2022 ROA, ROE No significant
Zaiane and Ellouze, 2022 ROA, ROE, Tobin’s Q Positive
Zhou, Liu and Luo, 2022 Tobin’s Q Positive
Source: Authors’ compilation

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firms show a positive influence of ESG on FP, with ROA, ROE, and Tobin’s Q as FP
indicators (Zaiane and Ellouze, 2022). Other studies with Firm value, EBIT, and Tobin’s
Q also depict positive influence (Qureshi, Kirkerud, Theresa and Ahsan, 2020; Carnini
Pulino, Ciaburri, Magnanelli and Nasta, 2022; Zhou, Liu and Luo, 2022). In line with
inconsistent findings, studies have also concluded that there is no significant linkage
between ESG and FP with ROA, ROE, and Tobin’s (Buallay, 2021; Sachin and Rajesh,
2022).
2.3 STUDY AREAS
Countries worldwide introduced different regulatory and mandatory guidelines for
firms to ease development along sustainable practices. Countries adopting ESG practices
concluded with divergent findings. Literature posits that most studies cover developed
nations showing positive results (Fifka, 2013). Table 2 summarizes studies across
different countries and their findings. The study addressing ESG and FP shows positive
impacts in the UK (Li, Gong, Zhang and Koh, 2018), Australia (Gholami, Sands and
Rahman, 2022), France (Boulhaga, Bouri, Elamer and Ibrahim, 2022), and Italy
(Carnini Pulino, Ciaburri, Magnanelli and Nasta, 2022). Literature in Chinese settings
documents both the positive and negative impact of ESG on FP (Ruan and Liu, 2021;
Zhou, Liu and Luo, 2022).

Table 2: Study Area

Authors Country Findings
Atan Alam, Said and Zamri, 2018 Malaysia No significant
Li, Gong, Zhang and Koh, 2018 UK Positive
Gholami, Sands and Rahman, 2022 Australia Positive
Ruan and Liu, 2021 China Negative
Boulhaga, Bouri, Elamer and Ibrahim, 2022 French Positive
Carnini Pulino, Ciaburri, Magnanelli and Nasta, 2022 Italy Positive
Zhou, Liu and Luo, 2022 China Positive
Source: Authors’ compilation

2.4 PERIODS OF OBSERVATIONS

Table 3 presents the study findings that vary with the observation period. Studies
show no significant impacts of ESG on FP covering four to five years of observation
(Atan et al., 2018; Sachin and Rajesh, 2022). Studies with an observation period of
more than five years show positive impacts of ESG on FP (Li, Gong, Zhang and Koh,
2018; Zaiane and Ellouze, 2022; Carnini Pulino, Ciaburri, Magnanelli and Nasta, 2022;
Boulhaga, Bouri, Elamer and Ibrahim, 2022; Gholami, Sands and Rahman, 2022).
The studies concluded that the negative impact of ESG on FP have mainly covered
shorter observation periods (Sharma, Bhattacharya and Thukral, 2019; Duque-Grisales
and Aguilera-Caracuel, 2021; Ruan and Liu, 2021; Jyoti and Khanna, 2021).

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Table 3: Observations Period

Authors Period Findings
Atan Alam, Said and Zamri, 2018 2010-2013 No significant
Li, Gong, Zhang and Koh, 2018 2004-2013 Positive
Sharma, Bhattacharya and Thukral, 2019 2011-2015 Negative
Garcia and Orsato, 2020 2007-2014 Negative
Gholami, Sands and Rahman, 2022 2007-2017 Positive
Jyoti and Khanna, 2021 2014-2018 Negative
Ruan and Liu, 2021 2015-2019 Negative
Abdi, Li and Càmara-Turull 2022 2008-2019 Negative
Boulhaga, Bouri, Elamer and Ibrahim, 2022 2012-2018 Positive
Carnini Pulino, Ciaburri, Magnanelli and Nasta, 2022 2011-2020 Positive
Duque-Grisales and Aguilera-Caracuel, 2021 2011-2015 Negative
Sachin and Rajesh, 2022 2014-2018 No significant
Zaiane and Ellouze, 2022 2002-2018 Positive
Source: Authors’ compilation

2.5 INDIAN STUDIES

Table 4 shows studies addressing the linkage of ESG and FP in the Indian context.
The literature suggests different FP indicators covering different observation periods,
concluding divergent findings in the Indian context. Empirical results indicate that
most of the studies have an observation period ranging from five to seven years
(Chelawat and Trivedi, 2016; Bodhanwala and Bodhanwala, 2018; Sharma,
Bhattacharya and Thukral 2019; Jyoti and Khanna, 2021; Hasan, Singh and
Kashiramka, 2021; Sachin and Rajesh, 2022).
Tables 1, 2, and 3 show that studies addressing the impact of ESG on FP vary with
variables, country, and period of observation. Table 4 shows study findings in the Indian
context changing with the observation period and variables. ESG research in the
Indian context mainly considered an observation period of five years, reporting positive,
negative, and no significant impacts on FP (Bodhanwala and Bodhanwala, 2018; Jyoti
and Khanna, 2021; Sachin and Rajesh, 2022). The present study considers an extended
observation period of 13 years. Table 3 shows that most studies with more extended
observation periods, i.e., more than five years, probably conclude the positive impact
(Boulhaga, Bouri, Elamer and Ibrahim, 2022; Carnini Pulino, Ciaburri, Magnanelli
and Nasta, 2022). Based on the above results, the study frames the hypothesis as
follows:
H1: ESG positively impacts FP.

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Table 4: Indian Studies

Authors Period Variables Findings
Chelawat and Trivedi, 2016 2009-2014 ROCE, Tobin’s Q Positive
Bodhanwala and 2010-2015 ROE, ROA, Return on Invested Positive
Bodhanwala, 2018 Capital (ROIC), Earnings
Per Share (EPS)
Dalal and Thaker, 2019 2015-2017 ROA, Tobin’s Q Positive
Sharma, Bhattacharya 2011-2015 ROA, Tobin’s Q Negative
and Thukral, 2019
Jha and Rangarajan, 2020 2008-2018 ROA, ROE, Tobin’s Q Insignificant
Hasan, Singh and 2014-2018 ROA, Tobin’s Q Mixed
Kashiramka, 2021
Jyoti and Khanna, 2021 2014-2018 ROA, Return on Capital Negative
Employed (ROCE)
Behl, Kumari, Makhija 2016-2019 Tobin’s Q Mixed
and Sharma, 2022
Sachin and Rajesh, 2022 2014-2018 ROA, ROE No significant
Sinha Ray and Goel, 2022 2011-2019 ROA, ROE, Firm Size, Market Positive
Capitalization, Profit Before
Depreciation, Interest and Tax
(PBDIT), Tobin’s Q, Share Price
Source: Authors’ compilation

3. THEORETICAL FRAMEWORK
3.1 STAKEHOLDER THEORY
Literature suggests multiple theories to explain the link between ESG and FP. The
Stakeholder theory enjoys more comprehensive reference to ESG and FP literature.
The theory postulates that a firm’s ability to satisfy the needs of various stakeholders
will boost the demand for the products and services and improve the FP (Freeman,
1984). Accordingly, firms must control their relationships with stakeholders to grow
and survive other than shareholders (Freeman, 1984). As per the neoclassical theory,
the preliminary studies addressing the linkage between ESG and FP show negative
findings (Vance, 1975; Wright and Ferris, 1997), and it continued to exist (Kim and
Lyon, 2014). Hence, shareholders believe investment in ESG practices is costly.
Subsequent research documents a positive linkage between ESG and FP (Fatemi,
Fooladi and Tehranian, 2015), supporting the stakeholder theory (Freeman, 1999).
Research concedes that firms’ expenditure in socially responsible activities is an
investment instead of an expense, which will positively impact FP (Freeman, 1984).
Such a positive impact generates a good reputation and relationship with its external
stakeholders (Donaldson and Preston, 1995). Satisfying stakeholders is equally
important as the shareholders as stakeholders do not carry the exit option in case of

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liquidation (Freeman, 1984). Satisfying the expectations of its dynamic and

heterogeneous stakeholders takes time and effort. Management should be able to
cope with these challenges to gain long-term success in its products and services
(Freeman, 1984). Every firm has financial and non-financial activities equally essential
to sustain in the sustainable consciousness world. Focusing only on economic activities
reporting will not be able to achieve long-term success. Different non-financial activity
reporting can attract and sustain a particular group of stakeholders (Deegan and
Blomquist, 2006). The stakeholder theory further posits that firms should be transparent
with financial and non-financial activities disclosure. As a result, firms disclose ESG
scores to serve the interests of their various stakeholders.
3.2 TRADE-OFF THEORY
Contesting the Stakeholder theory, which postulates the positive linkage between
ESG and FP, the Trade-off theory supports the antagonistic relation between ESG and
FP. The theory argues that adopting sustainable practices adds extra cost and burden
to the firm, decreasing the bottom line (Aupperle, Carroll and Hatfield, 1985). The
supporters of this theory believe that firms have only one social responsibility, i.e.,
toward the firms’ shareholders (Friedman, 1970). Hence, firms should be involved
only in those activities that benefit the shareholders economically (Wright and Ferris,
1997). Any investment in ESG activities will increase operating expenses, decreasing
the profit (Balabanis, Phillips and Lyall, 1998). It expects firms to generate profits and
focus only on maximizing shareholders’ wealth (Friedman, 1970; Pava and Krausz,
1996), which depicts the firms’ responsibility only towards the shareholders, not the
stakeholders. Hence, any cost incurred on non-financial activities will not be able to
create direct monetary benefits for the shareholders (Friedman, 2007). Firms with
sustainability activities will increase costs and lower profits, ultimately affecting the
shareholders’ wealth (Balabanis, Phillips and Lyall, 1998). The theory argues that any
cost towards ESG is an extra cost causing inefficient use of available resources
(Friedman, 1970; Jha and Rangarajan, 2020). Any cost incurred to adopt sustainable
practices will decrease the profit in the short term. However, it will benefit the
shareholders in the long term by building a reputation and creating a brand image,
ultimately reducing the business risk (Garcia and Orsato, 2020). Hence, shareholders
can maximize their wealth by adopting sustainability practices.
3.3 OTHER RELEVANT THEORIES
The stakeholder theory supports the positive link between ESG and FP, whereas the
trade-off theory advocates a negative relationship (Qureshi, Kirkerud, Theresa and
Ahsan, 2021). Alternatively, the Value creation theory concurs that ESG positively
impacts FP, indicating ESG as a tool to gain competitive benefit by improving FP
(Buallay, 2019). Firms that prioritize complying with existing regulations for sustainability
over competitors are the leaders in sustainable practices, resulting in wealth
maximization for both the firm and stakeholders (Porter, 1991). In contrast, the Cost
of capital reduction theory posits that ESG negatively impacts FP, indicating ESG
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lowers firm value by increasing cost (Buallay, 2019). Firms expect statutory sustainability
regulations to be a burden, reducing costs (Porter, 1991). Literature also reports
inconsistencies in findings in empirical studies and theoretical grounds (Qureshi,
Kirkerud, Theresa and Ahsan, 2021).

4. METHODOLOGY
4.1 STUDY DESIGN
The research follows a longitudinal study design.
4.2 SAMPLE SELECTION AND DATA
The study gathers data by accessing secondary sources. The study prefers the Bloomberg
database to collect ESG scores and FP variables. Bloomberg ESG scores are available
from 2006 onwards since consistent scores by most of the firms are available from 2009
onwards; the study selects an observation period from 2009 to 2021 for firms listed in
the Nifty 100 index. It prefers the Judgemental Sampling method to choose the sample
from the studied population, as per the Securities and Exchange Board of India (SEBI),
which has mandated disclosure only for listed firms in India. The basis of the Nifty-
100 index is on market value and reflects the top 100 firms out of the Nifty-500 index.
Notably, this diversified stock index represents the Indian economy sector. The initial
sample consisted of 1,300 observations, but firms with missing data reduced the final
sample size to 585 observations, as reported in the Appendix.
4.3 STUDY VARIABLES
Table 5 presents the study variables. The study proxies both accounting and market-
based variables to measure the FP. FP variables comprise three dimensions, i.e., ROA

Table 5: Study Variables

Variables
Measurement Authors
Name Types
ROA Dependent The ratio of Net Income to Average Total Assets Buallay, 2021
ROE Dependent The ratio of Net Income Available for Common Atan Alam, Said
Shareholders to Average Total Common Equity and Zamri, 2018
Tobin’s Q Dependent (Market Capitalization+ Total Liabilities+ Atan Alam, Said
Preferred Equity+ Minority Interest)/ Total Assets and Zamri, 2018
ESG Independent Bloomberg index, which combines E, S, and G Buallay, 2021
Firm Size Control Total Assets Buallay, 2019
Leverage Control The ratio of total debt to total equity Sharma
Bhattacharya
and Thukral, 2019
Source: Authors’ compilation

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to assess operating performance, ROE to estimate financial performance, and Tobin’s

Q to evaluate market performance. Applying the regression it incorporates two control
variables, i.e., the Total Assets (TA) for Firms Size and Leverage (Lev) for Risk. For
statistical analysis, it uses the 17th version of STATA software.
4.4 DATA ANALYSIS STRATEGY
Two types of variable diagnostics tests are employed to check the reliability and validity
of data. First, for checking the stationary nature of data, the Levin Lin and Chu
(LLC) test is used; second, it runs the Variance Inflation Factor (VIF) test for
multicollinearity issues. Table 6 presents the variables diagnostics test result. The
result shows that the data is stationary, as indicated by the LLC test, which is significant
at the 1% level. The VIF test result suggests that all the values are below 10, supporting
that the variables are free from the severe collinearity problem. Accordingly, the tests
allow the study to proceed with the regression.

Table 6: Variables Diagnostics

Stationarity Test Collinearity Test
Variables Labels
LLC Probability VIF
Dependent ROA –11.705 0.0000
Dependent ROE –9.961 0.0000
Dependent TOBIN’S Q –9.769 0.0020
Independent ESG –8.047 0.0000 1.789
Control TA –16.576 0.0668 1.463
Control LEV –4.968 0.0000 1.614
Source: Authors’ calculations

4.5 STUDY MODELS

The following are the models constructed to examine the impact of sustainable practices
on FP.
Model 1
ROAit =  0 +  1ESGit +  2TAit +  3LEVit + it
Model 2
ROEit =  0 +  1ESGit +  2TAit +  3LEVit + it
Model 3
Tobin’s Qit =  0 +  1ESGit +  2TAit +  3LEVit + it
where ROA it, the Return on Assets; ROE it, the return on Equity; ESG it, is the
Environmental, Social and Governance score; TAit is the total assets which refers to
the size of the firms; LEVit is the Risk of the firms, and it is the error term.

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The Modified Wald test is applied to check for heteroscedasticity for model
diagnostics. Table 7 presents the model diagnostic test result. The significant probability
value indicates that all three models have heteroscedasticity problems.

Table 7: Model Diagnostics

Heteroscedasticity Test
Model
Modified Wald Test Probability
ROA 5,522.04 0.0000
ROE 37,567.72 0.0000
Tobin’s Q 4.1e+05 0.0000
Source: Authors’ calculations

5. RESULTS
Table 8 shows the descriptive statistics of the study variables. It shows that the maximum
ESG score is 76.984%, and the minimum is 14.093%, indicating a considerable
difference between the firms disclosing the scores. ROE reports the highest average
value in the FP indicators, while Tobin’s Q indicates the lowest average value. The
standard deviation is the highest in ROE and lowest in Tobin’s Q among the FP
indicators. TA has the highest average and standard deviation in the control variables,
while LEV shows the lowest values.

Table 8: Descriptive Statistics

Variables Obs. Mean Median Std. Dev. Minimum Maximum
ROA 585 10.890 9.176 8.534 –28.647 45.111
ROE 585 22.539 19.851 20.353 –114.817 124.216
TOBIN’S Q 585 4.062 2.234 4.957 0.766 69.997
ESG 585 40.327 38.507 13.929 14.093 76.984
TA 585 699191.8 149757.0 1315221 2122.726 13212120
LEV 585 61.189 43.084 70.642 0.000 755.205
Source: Authors’ calculations

Table 9 shows the correlation coefficient of all the variables of the study. It shows
that among the dependent variables, ESG negatively correlates with all the FP variables,
i.e., ROA ROE and Tobin’s Q. Among the control variables, ESG positively correlates
with TA and negatively correlates with LEV. The multicollinearity problem is not
observed among the variables, as the correlation coefficient values are not high in any
of the variables except for ROA and ROE, which are the dependent variables.
To explore the impact of ESG on FP, the study first applied pooled OLS regression;
Table 10 presents the results. The results report that ESG impacts ROA and ROE

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Table 9: Correlation Coefficient

Variables ROA ROE TOBIN’S Q ESG TA LEV
ROA 1
ROE 0.837 1
TOBIN’S Q 0.589 0.518 1
ESG –0.113 –0.195 –0.085 1
TA –0.347 –0.274 –0.261 0.316 1
LEV –0.605 –0.428 –0.315 –0.099 0.224 1
Source: Authors’ calculations

Table 10: Pooled OLS Regression

Dependent Variables
ROA ROE Tobin’s Q
ESG –0.0692234 –0.2945632 –0.0200066
0.0206861*** 0.0562438*** 0.0146834
TA –1.19e-06 –1.79e-06 –6.80e-07
2.24e-07*** 6.08e-07*** 1.59e-07***
LEV –0.069515 –0.1217689 –0.0197208
0.00397*** 0.0107939*** 0.0028179***
Constant 18.76454 43.11783 6.551521
0.902451*** 2.453683*** 0.6405759***
Observations 585 585 585
R-squared 0.4246 0.2522 0.1407
Adjusted R-squared 0.4216 0.2483 0.1363
Prob. (F-statistic) 0.0000 0.0000 0.0000
Note: The above table presents the FE and RE for Model 1. The level of
Significance indicates as *p<0.1; **p<0.05;***p<0.01.

Source: Authors’ calculations

negatively and is statistically significant. Tobin’s Q shows insignificant impacts. Further,

both TA and LEV indicate negatively significant impacts with FP indicators.
The study runs panel data regression (Arellano, 2003). The two models popularly
used in panel data regression are the Fixed Effect (FE) and the Random Effect (RE)
models. Further, to choose the best model among the two models, the Hausman test is
used. Table 11 reports the regression result of Model 1. This model’s dependent variable
is ROA, which indicates firms’ operational performance; the independent variable is
the ESG score. Hausman test result suggests selecting the FE model. The FE model

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reports that ESG is negatively significant at a 5% significance level. Size is insignificant

among the control variables, but the business risk is significantly negative at a 5%
significance level.

Table 11: Regression with ROA

Variables Random Effects Fixed Effects
ESG –0.0773446 –0.0788304
0.0186401*** 0.019069***
TA –1.08e-06 –1.02e-06
2.69e-07*** 2.88e-07***
LEV –0.0490545 –0.045614
0.004224*** 0.004418***
Constant 17.76337 17.5738
1.095189*** 0.8214787***
Observations 585 585
R-squared 0.4178 0.4150
Hausman Test 7.39 (0.0248)
Note: The above table shows the FE and RE for Model 1. The level of Significance indicates as *p<0.1; **p<0.05;
***p<0.01.

Source: Authors’ calculations

In Table 12, the result of Model Diagnostics shows that the model has a
heteroscedasticity problem, and to overcome the same, it runs Robust regression. Table
12 presents the result, indicating that ESG is significantly negative at a 5% significance
level. Among the control variables, size and Risk are significantly negative at 10%
and 1% significance levels, respectively.

Table 12: Robust Regression

Variables Coefficient Robust Std. Error
ESG –0.0788304 0.0326493**
TA –1.02e-06 6.02e-07*
LEV –0.045614 0.0085394***
Constant 17.5738 1.636836***
Observations 585
R-squared 0.4150
Note: The above table shows the Robust regression for Model 1. The level of Significance indicates as *p<0.1;
**p<0.05; ***p<0.01.

Source: Authors’ calculations

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Table 13 shows the regression result of Model 2. In this model, the dependent
variable is ROE, which indicates firms’ financial performance; the independent variable
is ESG. Hausman test in this panel model suggests selecting the RE model. The RE
model shows a significantly negative impact at a 1% significance level. Among the
control variables, size is insignificant, but the business risk is significantly negative at
a 1% significance level.

Table 13: Regression with ROE

Variables Random Effects Fixed Effects
ESG –0.2810689 –0.2811006
0.050636*** 0.0520218***
TA –9.83e-07 –7.84e-07
7.31e-07 7.86e-07
LEV –0.1102012 –0.1082114
0.0114845*** 0.0120527***
Constant 41.30517 41.04544
3.004923*** 2.241066***
Observations 585 585
R-squared 0.2506 0.2495
Hausman Test 0.30(0.8613)
Note: The above table shows the FE and RE for Model 2. The level of Significance indicates as *p<0.1;
**p<0.05; ***p<0.01.

Source: Authors’ calculations

In Table 14, the result of Model Diagnostics shows that the model has a
heteroscedasticity problem, and to overcome the problem, it applies Robust regression.
Table 14 shows the result of the Robust Regression of Model 2, reporting that ESG is

Table 14: Robust Regression Result

Variables Coefficient Robust Std. Error
ESG –0.2810689 0.0666005***
TA –9.83e-07 6.66e-07
LEV –0.1102012 0.033185***
Constant 41.30517 3.998648***
Observations 585
R-squared 0.2506
Note: The above table shows the Robust regression for Model 2. The level of Significance indicates as *p<0.1;
**p<0.05; ***p<0.01.
*Source: Authors’ calculations

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significantly negative at a 1% significance level. Size is insignificant among the control

variables, while the Risk is significantly negative at 1%.
Table 15 reports the regression result of Model 3. In this model, the dependent
variable is Tobin’s Q, which indicates firms’ market performance; the independent
variable is ESG. Hausman test in this panel model suggests selecting the FE
model showing a positive impact at a 1% significance level. Among the control
variables, size is negatively significant at a 10 % significance level, and business risk is
insignificant.

Table 15: Regression with Tobin’s Q

Variables Random Effects Fixed Effects
ESG 0.0609915 0.0762128
0.0146647*** 0.0150779***
TA –5.25e-07 –3.85e-07
2.05e-07** 2.28e-07*
LEV –0.0085137 –0.0051503
0.0032721*** 0.0034933
Constant 2.490804 1.573123
0.7678758*** 0.6495466**
Observations 585 585
R-squared 0.0601 0.0184
Hausman Test 24.98(0.0000)
Note: The above table shows the FE and RE for Model 3. The level of Significance indicates as *p<0.1; **p<0.05;
***p<0.01.

Source: Authors’ calculations

Table 16 shows the result of Model Diagnostics, shows that the model has a
heteroscedasticity problem, and to counter the problem, it runs Robust regression.
Table 16 shows the result of the Robust Regression of Model 3, indicating that ESG is
significantly positive at a 1% significance level. Among the control variables, both size
and Risk report an insignificant impact.

Table 16: Robust Regression Results

Variables Coefficient Robust Std. Error
ESG 0.0762128 0.0251734***
TA –3.85e-07 2.96e-07
LEV –0.0051503 0.005185
Constant 1.573123 0.9884974

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Table 16 (Cont.)
Variables Coefficient Robust Std. Error
Observations 585
R-squared 0.0184
Note: The above table presents the Robust regression for Model 3. The level of Significance indicates as *p<0.1;
**p<0.05; ***p<0.01.
Source: Authors’ calculations

6. DISCUSSION
The study concludes a negative impact of ESG on firms’ operational performance
measured by ROA, affirming the literature (Duque-Grisales and Aguilera-Caracuel,
2021). The negative impacts are likely to occur as Indian firms are slowly adopting
sustainable practices. During the initial adoption stage, firms incur huge costs which
have a negative impact on firms’ operational performance. The finding contradicts
the findings of Australian listed firms, which have reported a positive impact (Gholami,
Sands and Rahman, 2022). The result also contrasts with the earlier Indian study,
which documents an insignificant impact (Sachin and Rajesh, 2022). The study has
documented an adverse impact of ESG on financial performance measured by ROE,
which follows the prior studies (Abdi, Li and Càmara-Turull, 2022). The negative
impact indicates that investors need to be more motivated by firms’ sustainable
practices, which increases their costs and leads to an adverse impact on their FP. The
findings contest the literature, which shows positive (Zhou, Liu and Luo, 2022) and
insignificant impacts (Sachin and Rajesh, 2022) using ROE to measure FP. Firms’
negative impact on ESG supports the Trade-off theory (Behl, Kumari, Makhija and
Sharma, 2022). Besides, results have reported a favorable impact on firms’ market
value taking Tobin’s Q as an indicator, which aligns with the previous literature (e.g.,
Boulhaga, Bouri, Elamer and Ibrahim, 2022). In contrast, results contradict the studies,
which have shown negative (Abdi, Li and Càmara-Turull, 2022) and insignificant
impacts with market-based variables proxying Tobin’s Q (Buallay, 2021). Firms’ positive
impact on FP supports the Stakeholder theory (Qureshi, Kirkerud, Theresa and Ahsan,
2021). The results deviate from that theory, which indicates that the ESG score brings
positive changes in FP measured by ROA and ROE. Empirical results of the study
indicate that adopting ESG will unlikely result in operational and financial benefits
for Indian listed firms.
Consequently, the managers should focus more on sustainable practices and their
reporting which is reflected in their FP. Firms’ control variables show divergent findings
with the FP proxies. Firm size shows no significant impact on Model 1 and Model 2,
i.e., ROA and ROE; and a significant positive impact on Model 3, i.e., Tobin’s Q.
Firm’s Leverage is significantly but negatively related to both Model 1 and Model 2;
and insignificantly related to Model 3, indicating that firms do not actively adopt
sustainable practices with high Leverage. Since India is the first country to make
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mandatory Corporate Social Responsibility, listed firms in India are still in the adoption
stage (Farhan, Al-ahdal, Bhatia and Ahmed, 2022). Very few firms disclose their
sustainability practices regularly, indicating that firms require more time to adopt and
disclose them regularly. The regular move by the SEBI will encourage listed firms to
adopt and disclose sustainability practices regularly, which will positively impact FP.

7. CONCLUSION
The study investigates the impact of ESG on the operational, financial, and market
performance of firms listed on the Nifty-100 index over a period of thirteen years
(2009-2021). To measure FP accounting indicators such as ROA and ROE are
considered and market-based indicators such as Tobin’s Q is considered. Two control
variables, Total Assets for Size and Leverage for Risk, are used to complete the
regression model. The results show that ESG negatively impacts the firms’ operational
performance and financial performance, whereas positively impacts the market
performance. In India, the mandatory disclosure and reporting of sustainable practices
for 100 listed firms has been applicable since 2012, further extended for 500 listed
firms in 2015 as laid down by the SEBI. Considering the importance of sustainability,
the impact of ESG on accounting and market-based indicators is estimated. From a
theoretical viewpoint, the study supports the trade-off theory with firm operational
and financial performance, indicating that firms spending on non-financial activities
will increase costs and decrease profits. The positive finding with the market
performance supports the stakeholder theory; satisfying the stakeholder will reduce
the business risk building reputation. Previous studies have supported the stakeholder
theory globally, whereas, in the Indian context, it supports the trade-off theory. The
developed economy focuses more on satisfying the stakeholders, showing the most
positive impact of ESG on firms’ operational and financial performance; in developing
economies like India, managers focus more on maximizing the wealth of shareholders,
viewing spending on ESG as a cost that negatively impacts the operational and financial
performance.
The academic audience should consider a few limitations of the study before its
generalization in a broader context. The current research confines to Indian Nifty 100
indexed firms. The study proxies accounting and market-based variables for measuring
FP, of which the former is the balance sheet items. The study uses secondary data,
which may have inherent limitations. The study examines only the direct impact of
ESG on FP. Moreover, to measure sustainable practices, it uses only the aggregate
score of ESG. The study uses only three proxies to measure FP among various indicators
reported in the literature. The study uses the ESG score provided by Bloomberg.
The findings have important implications for sustainable sensitive stakeholders
who prioritize sustainability and base their decisions on firms adopting sustainable
practices. The findings of this study can be utilized by policymakers to frame policies

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that do not impose excessive burdens on firms, but instead encourage the possible
advantages that they can attain. The findings are expected to provide valuable insights
for managers seeking to effectively implement sustainable practices, attract customers
and investors, and generate revenue, which can increase the level of disclosing non-
financial information. Investors can use the findings to make a rational decision, as
studies in the Indian context depicts mixed result indicating ESG scores do not
necessarily benefit the FP. The findings will be helpful for the government to assess
firms based on sustainability as the present study adheres to the findings of the previous
Indian studies. The results show that firms adopting sustainable practices could benefit
vis-a-vis firms where the adoption of ESG is still in its early stage. Accordingly, listed
firms should adopt sustainable practices for a continuous and more extended time
frame. The results of this study are expected to make a substantial contribution to the
existing body of knowledge on firms’ initiatives towards sustainable development.
Future Research: It may incorporate the findings in a broader context covering all
the listed firms. Future research agenda may assess sustainable practices’ impact across
countries and sectors. Studies may investigate the impact of individual component
factors on FP. Firms incur a considerable cost to comply with ESG metrics, so in the
initial stage, the findings would show a negative impact; therefore, future research
can study the impact of ESG on FP by taking a more extended period. Future research
endeavours could compare the impacts of ESG on FP between developed and
developing economies. Future research agenda may incorporate the excluded variables
of the current study based on the items of the balance sheet and the income statement
as the proxies of FP. Studies can collect primary data to analyze the spending and
disclosure made by firms in sustainable practices and their impacts on FP. Studies in
the future may examine the indirect impact by focusing on new mediating and
moderating variables. Studies can compare ESG scores provided by different rating
agencies to measure FP.

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Appendix

Companies Selected for Final Sample Size

S. Company Name Industry Market
No. Capitalization
1. RELIANCE INDUSTRIES LTD Oil Exploration and Production 3566191.092
2. HINDUSTAN UNILEVER LTD Household & Personal Products 577645.8137
3. ITC LTD Diversified 950039.5846
4. INFOSYS LTD IT Services & Consulting 1491822.525
5. BHARTI AIRTEL LTD Telecommunication 1252044.89

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Appendix (Cont.)
S. Company Name Industry Market
No. Capitalization
6. LARSEN & TOUBRO LTD Engineering & Construction 1007017.695
7. ASIAN PAINTS LTD Paints 172297.5629
8. MARUTI SUZUKI INDIA LTD Automobile 450728.4967
9. TITAN CO LTD Diamond & Jewellery 63181.0831
10. ADANI ENTERPRISES LTD Trading 216269.6516
11. ULTRATECH CEMENT LTD Cement 113805.1013
12. NESTLE INDIA LTD Consumer Food 245663.1421
13. OIL & NATURAL GAS CORP LTD Oil Exploration and Production 2519592.449
14. JSW STEEL LTD Iron & Steel 189518.0427
15. NTPC LTD Power Generation/Distribution 1943043.79
16. ADANI PORTS AND Transport Infrastructure 221755.7846
SPECIAL ECON
17. TATA STEEL LTD Iron & Steel 548032.1566
18. PIDILITE INDUSTRIES LTD Diversified chemicals 49398.6787
19. INDIAN OIL CORP LTD Refineries 742710.6369
20. GRASIM INDUSTRIES LTD Diversified 226917.5379
21. BRITANNIA INDUSTRIES LTD Consumer Food 40144.755
22. VEDANTA LTD Metals 337067.3173
23. TECH MAHINDRA LTD IT Services & Consulting 121159.2343
24. HINDALCO INDUSTRIES LTD Iron & Steel 307775.715
25. DABUR INDIA LTD Household & Personal Products 137485.8977
26. GODREJ CONSUMER Household & Personal Products 81748.0037
PRODUCTS LTD
27. DIVI’S LABORATORIES LTD Pharmaceuticals & Drugs 88487.9442
28. AMBUJA CEMENTS LTD Cement 158804.0301
29. BHARAT PETROLEUM CORP LTD Refineries 229773.8819
30. BHARAT ELECTRONICS LTD Engineering 155284.005
31. SRF LTD Diversified 12391.1375
32. TATA CONSUMER Tea/Coffee 58194.5321
PRODUCTS LTD
33. GAIL INDIA LTD Gas Distribution 524261.9687
34. APOLLO HOSPITALS ENTERPRISE Hospital & Healthcare Services 40580.3228
35. MARICO LTD Household & Personal Products 62845.0882
36. BERGER PAINTS INDIA LTD Paints 19132.6208
37. UNITED SPIRITS LTD Breweries & Distilleries 158286.5033

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 SOUTH ASIAN JOURNAL OF MANAGEMENT

Appendix (Cont.)
S. Company Name Industry Market
No. Capitalization
38. TORRENT PHARMACEUTICALS Pharmaceuticals &Drugs 33344.4074
LTD
39. UPL Pesticides & Agrochemicals 76238.3178
40. PI INDUSTRIES LTD Pesticides & Agrochemicals 1885.408
41. SAMVARDHANA Auto Ancillaries 46923.2285
MOTHERSON INTERN
42. INFO EDGE INDIA LTD Misc. Commercial Services 24184.7348
43. PROCTER & GAMBLE HYGIENE Household & Personal Products 56573.0303
44. PAGE INDUSTRIES LTD Textiles & Apparel 9712.3457
45. ACC LTD Cement 163794.0207

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