IMPACT OF ESG SCORES ON FIRM PERFORMANCE: AN EMPIRICAL STUDY OF NIFTY 200

Abstract

This research paper will explore how the Environmental, Social, and Governance (ESG) scores determine the financial performance of companies in the vibrant corporate environment in India. Since the Net Zero emissions target is committed under the country and mandatory sustainability disclosures are institutionalised by the Business Responsibility and Sustainability Reporting (BRSR) framework, the measurement of the economic relevance of the ESG performance has become a necessity across various market participants. The main goal of the research is to establish the effects of composite ESG ratings as well as the scores of individual pillars of profitability on market based valuation and accounting-based profitability. Using a balanced dataset of 138 non-financial Nifty 200 firms with three financial years (414 firm-year observations), the panel regression employs Tobin Q as a proxy of the investor perceived value and Return on Assets (ROA) as a measure of operational efficiency, and a fixed-effects panel regression. Its findings reveal what the paper refers to as an ESG paradox: at the composite and pillar-level ESG performance, each significantly and positively correlates with market valuation, but their respective correlations with short-run profitability are negative. In the category of individual pillars, Governance comes out as the driving force between firm value and internal efficiency gains. The results suggest that ESG obligations, though they are likely to drive short-term earnings down in compliance and transition costs, are seen by the capital markets as believable signs of less risky behaviour and sustainable value creation. The paper concludes that ESG involvement is no longer a discretionary corporate undertaking, but is now a strategic requirement which has a material impact on the valuations of markets- observations that have both practical import to corporate strategists, institutional asset managers and regulators in their efforts to align business development with the sustainability agenda in India.