ESG‐Firm Performance Nexus: Evidence From an Emerging Economy

Ajithakumari Vijayappan Nair Biju, Sreelekshmi Geetha, Salu Prasad, Aghila Sasidharan and Ambili Jayachandran

Business Strategy and the Environment, 2025, vol. 34, issue 3, 3469-3496

Abstract: Firms worldwide are strengthening environmental, social and governance (ESG) factors, indicating a bidirectional association between financial and non‐financial performance. Understanding the ambiguity around the predictors of the firm's ESG performance, we attempt to reappraise the ESG‐ firm performance (FP) linkage using the firms indexed in the NIFTY 100 ESG index spanning 2014 to 2023. Our findings highlight that market forces significantly influence firms' ESG performance; however, in emerging economies, the direct relationship between ESG and FP appears to be insignificant. Surprisingly, corporate governance positively moderates the ESG–FP linkage, strengthening this association. Among the four proxies for market forces, the Volatility Index (VIX) shows a significant impact, where higher market volatility is associated with improved ESG performance, and lower volatility corresponds to weaker ESG performance. Conversely, the World Uncertainty Index (WUI) exhibits a negative significance, suggesting that higher WUI adversely affects the ESG performance of firms in emerging economies, while lower WUI has a favourable effect. Green bonds have a positive and significant effect on overall ESG performance and on social and governance dimensions; however, their influence on environmental performance is not significant, raising concerns about potential greenwashing trends. Strikingly, our findings indicate that emerging economy firms do not consider systematic risk, suggesting that investors' risk perceptions remain unchanged regardless of whether firms over‐ or under‐invest in ESG initiatives. Our research calls for greater attention to policymakers by providing accurate reasonings for the ESG performance of emerging economy firms.

Date: 2025
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