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International Journal of Scientific Research in Engineering and Management (IJSREM)
Volume: 07 Issue: 08 | August - 2023 SJIF Rating: 8.176 ISSN: 2582-3930
© 2023, IJSREM | www.ijsrem.com DOI: 10.55041/IJSREM25224 | Page 1
Does ESG Improve Firm Performance? Evidence from Indian Companies
Somali Deb1, SK Sajit2, Biki Digar3
1Assistant Professor, Department of Commerce, JD Birla Institute, Kolkata, West Bengal, India
2Guest Lecturer, KD College of Commerce and General Studies, Midnapore, West Bengal, India
3Biki Digar, Academic Associate, Indian Institute of Management (Calcutta), Kolkata, West Bengal, India
---------------------------------------------------------------------***---------------------------------------------------------------------
Abstract - This research paper explores the association
between ESG i.e.; Environmental, Social, and Governance
factors, and the financial performance of 37 Indian companies.
It shows how ESG financial execution influences the
profitability of companies and its contributions toward
sustainable development. It employs various regression models
including pooled OLS, fixed effect, and random effect models
as well as dynamic panel regression. This study results
positively significant connection between ESG performance
and firm performance in terms of capital efficiency. Return on
Assets (ROA), Return on Equity (ROE) and Return on Capital
Employed (ROCE) - these various financial metrics have
demonstrated this positive connection. To support our findings
this study employs both static and dynamic panel analysis. The
insights of this paper are valuable for the stakeholders including
policymakers, corporate managers, and investors who are
interested in ESG principles and in understanding the
relationship between ESG practices and companies financial
performance.
Key Words: ESG; Firm Performance; Sustainability; GMM
Model.
JL Classification: L25; Q56; C32; C33.
1. INTRODUCTION
ESG’ as the name defines Environment, Social, and
Governance performance on the value and profitability of
companies, so it is quite beneficial and mandatory to run
these activities by a company. It is necessary to take
mitigation measures and to disclose transparent financial
outcomes to investors, employees, suppliers, customers,
and the government as well. Only the goal of profit
maximization cannot make a company to reach on top,
rather taking care of ESG performance may be one of the
most important reasons not only in increasing profits but
also in the maximization of value of companies. So all the
listed companies are disclosing specific ESG financial
information or explaining the reason why this
information is not disclosed (Zhao et al, 2018). This will
have a great emphasis on quality with little focus on
quantity. Positive financial outcomes due to ESG may
push return on equity to its highest including
improvement in the cost of capital and enhancing stock
price performance (Rao et al, 2023). According to 87% of
investors, corporate reporting on sustainability contains
green washing, and 82% say their clients demand that
ESG factors to be taken onto account (PWC). Return on
Equity (ROE), Return on Assets (ROA), Stock price,
operational efficiency and risk management can be
improved by strong corporate management of ESG (NYU
Stern Center for sustainable business, 2015). The
environment, social and governance and its impact on
financial performance has great influence on market
participants as well. So ESG performance may lead a
company in growing opportunities, healthy environment,
productivity, investment, ESG strategy and regulation
also. This will be helpful in reducing cost and in the
maximization of both profit and value.
ESG have become increasingly important in the
investment world, as investors recognize the potential
impact of sustainable and responsible business practices
on financial performance. The integration of ESG
considerations into investment decisions aims to not only
generate financial returns but also promote positive
environmental and social outcomes. That’s why majorly
listed company disclosed ESG information. Also, it's
important because it can ameliorate a company’s image
and character, which will attract further investors. It
forces companies to introduce, which uncovers all kinds
of new openings and good for terrain. Embracing ESG
factors can have a positive impact on companies by
enhancing their reputation, mitigating risks, driving cost
savings, improving access to capital, fostering
innovation, engaging stakeholders, and creating long-
term value. ESG considerations are increasingly
recognized as key drivers of sustainable business success.
Profit maximization to long-term sustainability – sole
mantra of the business throughout the era (Chelawat and
Trivedi, 2016). But in last decade a tremendous changes
happen in the business scenario; all business concerns are
now bound to play an environmental-social-governance
responsibilities while aiming the profit maximization.
India is a fast-moving economy. Environmental and
social challenges are part and parcel of business
environment. In India, amendment of ESG reporting is
started from 2011with the Minister of Corporate Affairs
(MCA), Government of India (GOI), issuing the National
Guidelines on social,
Environment and economic responsibilities of Business
(NVGs) (MCA, 2011). SEBI recently mandate ESG
reporting for listed companies. A long-term positive
association can be established by ESG disclosure and
annual average share price of the listed companies. In
International Journal of Scientific Research in Engineering and Management (IJSREM)
Volume: 07 Issue: 08 | August - 2023 SJIF Rating: 8.176 ISSN: 2582-3930
© 2023, IJSREM | www.ijsrem.com DOI: 10.55041/IJSREM25224 | Page 2
other words, ESG is an efficient policy for portfolio
selection as per sustainable and responsible investment
(Ray & Goel, 2020). As per investment consideration
ESG works in two-way, enhances risk management and
generate sustainable yields for the customers (Dalal &
Thaker,2019). ESG performance enhances the financial
outcomes at a lower risk. Growth in the ESG-Score has
positive impact on the earnings of the company
(Manescu, 2010). So, ESG Performance and their
disclosure is an important implications for investors,
customers, investors, corporate management,
policymakers and regulators. Trust among stakeholders
can be established by measuring and reporting the ESG
performance of companies as well. This paper consists 37
listed companies showing last 5 years ESG scores and
giving a clear picture of ESG performance of those
companies.
Performance and position are important to the company’s
larger group of stakeholders and this can be evaluated by
ESG metrics (Kay et al, 2020). Popularity among publicly
related firms can be increased by ESG disclosures due to
response to the investor’s demand, establishing
credibility, and reacting to crises and competition in their
respective industries (Olsen et al ,2021). Corporations are
receiving an economic rewards from their activities by
engaging ESG practices (Yoon et al, 2018). Sustainable
global economies are getting continuous support from
international organizations, sector institutions and
governments ( SSE,2022).ESG issues are having much
importance in the decision-making by companies and
investors ( Eccles & Youmans,2015).
By performing the ESG activities companies are
improving their stock performance. Not only this they are
able to reduce their cost of capital. And this impacts on
the financial performance positively. The improvements
make the returns fruitful to them. Mostly ESG is
positively related with financial performance. The
improvements in financial performance are becoming the
reasons towards sustainable developments. There should
be transparent ESG report to the stakeholders from the
companies’ end. By providing accurate information they
can earn that trust from their stakeholders. It enhances the
reputation of the companies among investors who are
looking for sustainable investments. Companies will be
able to find out the areas where they need to improve and
this may lead to cost savings as well as increase
efficiency.
In this study it is shown how non-financial data such as
ESG disclosures are influencing financial performance of
the companies and there are three models –ROA, ROE
and ROCE have been constructed with having three types
of analysis named Pooled OLS, Fixed Effect and Random
Effect Model.
.
2. LITERATURE REVIEW
Businesses which point out ESG factors are more
likely to be for years sustainable, based on investors.
By taking account of the regulatory environment,
environmental and social risks, risk management, and
good governance practices, these firms can limit
anticipated adverse effects, boost disclosure and
openness, and generate value over time (Halid et al.,
2022).As a result of such issue, investors are
encouraged by the United Nations Principles for
Responsible Investment (UNPRI) to take ESG
aspects into account when making investments in
order to create a persistent and durable global
financial system, it aims to encourage a more
profound dedication to ethical investment practices.
Likewise certain firms have already been granted
license to use ESG ideas across different
sectors. Besides that, various company have been
promptly given to integration ESG practices to
several field of their business ESG is an efficient
policy for portfolio selection as per sustainable and
responsible investment (Ray & Goel, 2020). As per
investment consideration ESG works in two ways,
enhancing risk management and generating
sustainable yields for the customers (Dalal & Thaker.
2019). (Velte, P. 2017) In this article, we looked at
the connection between ESG performance and firm
financial performance caused by 412 firm-year
observations the prime-standard listed companies in
Germany (MDAX, TecDAX, DAX30) that were
included in the sample. We discovered a strong
association between sustainability performance and
firm revenue growth using stakeholder theory. Tobin
Q is not greatly impacted by ESG, despite the fact
that it has a favorable effect on ROA. In contrast to
ESG, governance performance has a big effect on
how well the business does financially.
(Balasubramanian et al., 2019) Uses information
from 2014 to 2018 collected by Yahoo Finance and
Prowess IQ to investigate the connection between
ESG ratings and firm financial outcomes. Tobin's Q
is adopted to choose companies using the Nifty 100
index as an agent for the corporation value and
outcomes. ESG subcategories of the sustainable
score, together with business size, have additional
effects on firm value. The ESG score has a
considerable impact on outcome. The assumptions
have been tested using standard linear squares.
According to (Sinha ray et al, 2023) This paper
delivers major help to the field of sustainable research
by exploring the link between ESG outcome and
Stability in finance furthermore to the mediation role
that financial performance plays. Financial
performance serves as a link variable in this research
to examine how ESG outcome influences the Value
of publicly listed companies. With the company's
International Journal of Scientific Research in Engineering and Management (IJSREM)
Volume: 07 Issue: 08 | August - 2023 SJIF Rating: 8.176 ISSN: 2582-3930
© 2023, IJSREM | www.ijsrem.com DOI: 10.55041/IJSREM25224 | Page 3
financial success clearly operating as a mediating
component, the study presents concrete proof that an
organization value on the marketplace could grow by
increasing its ESG outcomes. The work offers
regulators, public companies, and investors valuable
advice. According to (Partalidou et al., 2020)
Companies communicate their CSR efforts through
integrated reports, sustainability reports, and press
releases. The focus should be on the quality and
accuracy of ESG information, as some companies
may use embellishments to improve reputation
despite subpar ESG performance. Credible and
reliable ESG disclosures are crucial for evaluating
sustainability practices. Disclosure channels include
annual reports, websites, ESG data providers, and
regulatory filings, while third-party verification
enhances credibility. Choosing appropriate sources
fosters transparency and trust with stakeholders. (Bui
et al., 2020) Extensive research has been conducted
to explore the connection between ESG outcomes
and financial outcomes. One important area of study
investigates whether the disclosure of ESG data
positively impacts financial achievement. This
relatedness is rooted in the belief that enterprises that
provide greater comprehensive knowledge about
their ESG initiatives and allocate greater resources to
Corporate Social Responsibility (CSR) are more
likely to embrace sustainable business practices.
Consequently, such practices may lead to corporate
enhancements, competitive advantages, and an
improved reputation. (Zhou et al, 2022) In this paper
significantly advances the area of ESG research by
investigating the link between sustainable outcomes
and business financial accomplishments in addition
to the mediating function of financial
accomplishment. In this investigation, financial
performance is used as a link variable to assess how
ESG outcomes affect the monetary value of publicly
traded firms. The study provides empirical evidence
that enhancing a company's ESG outcomes may raise
its market value, with the enterprises financial
efficiency unmistakably serving as a mediating
element. This resource provides helpful guidance for
Authorities, that are publicly traded corporations, and
shareholders can all benefit from the advice in this
resource.
3. RESEARCH GAPS
Previous studies concluded that ESG performances effect
firm’s performance. But, not given any information that
ESG has a significant impact on the risk, income, and
company’s financial performance. Thus, considering the
research gap the main objectives of the study is to ESG
Score and analyses the financial performances of the
selected Indian companies to know the impact of ESG.
4. OBJECTIVES
• To show relation between the ESG scores and
financial performance of the listed companies.
• Knowing the impact of ESG performance on
financial performance.
• To know the impact of ESG performance towards
sustainable development in India.
5. HYPOTHESIS
H1: There is significant relationship between ESG
Score and ROA.
H2: There is significant relationship between ESG
Score and ROE.
H3: There is significant relationship between ESG
Score and ROCE.
6. RESEARCH METHODOLOGY
DATA COLLECTION
Data are collected for this study completely based on
secondary sources (CMIE Prowess Database). Authors
selected S&P ESG 100 companies from the Indian stock
market. But only 37 companies are considered on the
basis of data availability.
STUDY PERIOD
For the purpose of the study S&P ESG 100 companies
considered as a sample data, for 5 consecutive years,
from 2018 to 2022.
Table -1: Variable Description
VARIAB
LE
MEASUREME
NT
ACRON
YM
VARIAB
LE
Return on
Asset
(EBIT+Deprecia
tion)/
Total Asset
ROA
Depende
nt
Variable
Return on
Equity
Equity/Total
Assets
ROE
Depende
nt
Variable
Return on
Capital
Employe
d
EBIT/Capital
Employed
ROCE
Depende
nt
Variable
ESG
Score
S&P ESG 100
ESG
Independ
ent
Variable
Firm Size
Natural log of
Assets
SIZE
Independ
ent
Variable
International Journal of Scientific Research in Engineering and Management (IJSREM)
Volume: 07 Issue: 08 | August - 2023 SJIF Rating: 8.176 ISSN: 2582-3930
© 2023, IJSREM | www.ijsrem.com DOI: 10.55041/IJSREM25224 | Page 4
Leverage
Total
Debt/Equity
LEV
Independ
ent
Variable
The firm performance is considered as dependent
variable, which is measured by return on asset (ROA),
return on equity (ROE) and return on capital employed
(ROCE) respectively. ESG Score i.e., ESG performance
considered as independent variable. Also, firm size and
leverage are considered as control variables to know the
impact of other determining factors to financial
performance.
DATA ANALYSIS
Table 2: Descriptive Statistics
Obse
rvati
ons
Mea
n
Stand
ard
Deviat
ion
Mi
n
Ma
x
VI
F
1/V
IF
ESG
185
44.54
23.86
9
89
1.
36
0.73
75
ROA
185
9.446
8.74
-
8.8
7
35.1
5
ROE
185
18.57
19.50
-
28.
84
105.
51
ROCE
185
15.74
18.38
-
13.
6
97.2
LEV
185
.6317
1.0830
1
0
5.04
1.
65
0.60
60
SIZE
185
4.664
.7087
3.1
3
6.31
5
1.
76
0.56
65
Me
an
VIF
1.
59
Table 2 represents the result of descriptive statistics
summary which shows the mean, minimum, maximum
values and SD of independent and dependent variables
used in the research. This table reveals that minimum
ROA is -8.87 and maximum value is 35.15 with the mean
value of 9.446. Mean values of ROE and ROCE are 18.57
and 15.74 respectively. ESG score varies between 9 and
89 and the average value is 44.54, which indicate that
ESG performance is moderate.
VIF value are calculated to check the existence of
multicollinearity among variables, independent and
control variables. Mean VIF is 1.59 which is much lower
than maximum acceptance level i.e., 5. No
multicollinearity presents between the variables.
Table 3: Person Correlation Coefficient
ES
G
ROA
ROE
ROC
E
LEVERA
GE
SIZ
E
ESG
1.0
000
ROA
0.2
621
1.000
0
ROE
0.3
557
0.842
0
1.000
0
ROCE
0.2
983
0.875
3
0.967
0
1.000
0
LEV
(0.1
888
)
(0.42
86)
(0.18
72)
(0.35
64)
1.0000
SIZE
0.3
137
(0.66
49)
(0.48
30)
(0.56
06)
0.5091
1.00
00
Table 3 shows the person correlation coefficient between
the variables. Some of correlation coefficient are
statistically significant and positive relationship between
ESG score and firm performances.
Table 4: Static Panel Regression (Dependent Variable –
ROA)
Vari
able
Pooled
-OLS
FIX
ED
effec
t
Ran
dom
Effe
ct
Haus
man
Lagra
ngian
Accep
tance
ESG
.04760
67
(0.041)
.041
716
(0.04
1)
.048
6265
(0.00
7)
0.806
7
0.0000
REM
is
accept
ed.
LEV
1.4743
79
(0.010)
2.15
7567
(0.03
9)
1.66
1944
(0.02
5)
SIZE
-
6.5512
46
(0.000)
-
9.40
9225
(0.00
3)
CON
STA
NT
43.055
04
(0.000)
56.5
5697
(0.00
0)
Ordinary Least Square (OLS), fixed effect model (FEM)
and random effect model (REM) – these methods of
multiple regression are applied to analyses the panel data.
In Table 4, the author shows the positive impact of ESG
score on return on asset (ROA) in every model. But every
model has their own assumptions. Hausman test applied
to select more appropriate model between FEM and
REM. Table 4 shows that the Hausman test is significant
International Journal of Scientific Research in Engineering and Management (IJSREM)
Volume: 07 Issue: 08 | August - 2023 SJIF Rating: 8.176 ISSN: 2582-3930
© 2023, IJSREM | www.ijsrem.com DOI: 10.55041/IJSREM25224 | Page 5
(0.8067) at the 5% level of significance and the null
hypothesis accepted. So, the REM is more appropriate.
Thereafter the lagrangian test is applied to select between
OLS and REM. The result represents that the Lagrangian
Test is significant (0.000) at the 5% level of significance
and reject the null hypothesis. Finally, in this table REM
is most appropriate to test the effectiveness of ESG score
with ROA.
Table 5: Static Panel Regression (Dependent Variable –
ROE)
Variab
le
Pool
ed-
OLS
FIX
ED
effec
t
Ran
dom
Effe
ct
Haus
man
Lagra
ngian
Accep
tance
ESG
.195
5845
(0.00
1)
.040
5484
(0.50
9)
.097
7513
(0.06
5)
0.323
4
0.0000
REM
is
accept
ed.
LEV
-
.601
392
(0.68
1)
-
.484
4168
(0.87
7)
.614
98
(0.76
5)
SIZE
-
10.7
5671
(0.00
0)
-
27.2
0069
(0.00
4)
14.1
8476
(0.00
0)
CONS
TANT
77.8
263
(0.00
0)
147.
57
(0.00
1)
88.7
0033
(0.00
0)
Table 5 shows that the value of Hausman test is 0.3224 at the
5% level of significance and the null hypothesis accepted. So,
the REM is more appropriate. Thereafter the Lagrangian Test
is applied to select between OLS and REM. The result reveals
that the Lagrangian Test is significant (0.000) at the 5% level
of significance and accept the alternative hypothesis. Finally,
in this table REM is most appropriate to test the effectiveness
of ESG score with ROA.
Table 5: Static Panel Regression (Dependent Variable –
ROCE)
Variab
le
Pool
ed-
OLS
FIX
ED
effec
t
Ran
dom
Effe
ct
Haus
man
Lagra
ngian
Accep
tance
ESG
.162
7527
(0.00
3)
.069
3482
(0.17
4)
.112
4639
(0.01
2)
0.323
5
0.0000
REM
is
accept
ed.
LEV
-
3.31
3817
(0.01
2)
-
3.80
2634
(0.14
4)
-
2.54
5179
(0.15
6)
SIZE
-
10.2
4151
(0.00
0)
-
25.7
7045
(0.00
1)
13.2
809
(0.00
0)
CONS
TANT
72.8
4909
(0.00
0)
141.
4468
(0.00
1)
84.3
0649
(0.00
0)
Table 5 represents that 0.8067 is calculated value from
the Hausman Test at the 5% level of significance and the
alternative hypothesis rejected. So, the REM is more
appropriate. Thereafter the Lagrangian Test is applied to
select between OLS and REM. The result shows that the
Lagrangian Test is significant (0.000) at the 5% level of
significance and reject the null hypothesis. Finally, in this
table REM is most appropriate to test the effectiveness of
ESG score with ROA.
Table 6: GMM-based Dynamic Panel Regression
One-
step
(ROA)
Two-
step
(RO
A)
One-
step
(RO
E)
Two-
step
(RO
E)
One-
step
(RO
CE)
Tw
o-
ste
p
(R
OC
E)
ESG
SCOR
E
.086778
(0.001)
.0632
648
(0.00
4)
.0896
409
(0.52
5)
.0248
984
(0.72
1)
.1422
684
(0.11
5)
.10
504
19
(0.
026
)
LEVA
RAGE
1.936365
(0.175)
1.249
022
(0.86
1)
-
1.987
359
(0.64
2)
3.012
59
(0.20
5)
-
3.156
557
(0.25
0)
2.7
798
66
(0.
046
)
FIRM
SIZE
-4.35068
(0.584)
4.072
411
(0.62
1)
-
25.29
341
(0.37
5)
-
27.06
474
(0.00
0)
-
23.31
139
(0.38
5)
-
26.
161
73
(0.
003
)
CONS
TANT
33.62856
(0.394)
20.39
278
(0.31
6)
151.4
406
(0.27
5)
158.8
374
(0.00
0)
137.4
504
(0.29
8)
152
.49
45
(0.
001
)
WAL
D
TEST
11.19
9.43
4.71
29.64
4.70
16.
66
AR (1)
-.15648
-
.2357
3
1.442
6
2.099
7
1.669
9
2.7
812
International Journal of Scientific Research in Engineering and Management (IJSREM)
Volume: 07 Issue: 08 | August - 2023 SJIF Rating: 8.176 ISSN: 2582-3930
© 2023, IJSREM | www.ijsrem.com DOI: 10.55041/IJSREM25224 | Page 6
AR (2)
1.7108
1.966
2
-.562
-
.2070
1
-
.0319
1
.46
927
SARG
AN
TEST
8.57
6.49
3.4
9
OBSE
RVAT
ION
185
185
185
185
185
185
Random effect model (REM) is failed to encounter the
endogeneity problem and the estimates cannot be robust.
Dynamic relationship eliminates the problem of
endogeneity. The research considered the Arellano and
Bond (1991) dynamic panel regression model. This
model also includes some post estimation test (Sargan test
and Arellano-Bond test) to test the validity and
autocorrelation of instruments. In Table 6, the Sargan test
statistics are insignificant (8.57, 6.49 and 3.49) and
accepts null hypothesis, which indicates the instruments
are valid and unrelated and reveals the second order
Arellano-Bond is not significant, which means absence
autocorrelation in this model. Finally, the study shows
both one-step and two-step estimation of dynamic panel
regression are significant, positive (coefficient value
.086678,.0632648) and significant (p-value 0.001, 0.004)
relationship between ESG score and firm performance.
Figure-1
Figure-2
7. CONCLUSION
In this paper, the used factors are increasingly considered
important for long-term financial success and this will
lead to sustainable development. Those companies that
have focused on sustainable development and are aligned
with ESG principles, attract socially conscious investors,
not only but also give a commitment to addressing global
challenges. The positive impact of ESG on financial
performance can make companies reach on top in the long
term. This research paper shows that ROCE is more
(Figure-1, Figure-2) significant in comparison With ROA
and ROE but still, ROA and ROE are significant and it
impacts positively on equity and asset returns by ESG
performance. Mainly this study concludes a significant
positive upward relationship between ESG.
This study only mainly focuses on Indian companies. For
future study companies from other countries need to be
assigned. Due to the unavailability of data only 37
companies are considered. The result will more accurate
if the size of the sample increased.
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