When does ESG create value? Corporate governance as a moderating mechanism in Indian firms

Abstract

This study examines whether corporate governance determines if environmental, social and governance (ESG) performance translates into financial value for Indian listed firms. It draws on 711 firm year observations for 341 firms listed on the National Stock Exchange of India between 2019 and 2023. ESG data come from Refinitiv and accounting data from CMIE Prowess. The analysis uses firm and year fixed effects regressions with standard errors clustered at the firm level. Financial performance is measured by return on assets (ROA), with Tobin’s Q used as a market-based robustness check. Governance quality is captured by a composite index covering board size, board independence, board gender diversity, CEO duality, audit committee independence, and foreign institutional ownership. ESG performance has no statistically significant direct association with either performance measure. However, the ESG–governance interaction is positive and significant for ROA, but insignificant for Tobin’s Q. At the pillar level, the social interaction is positive and significant for ROA, while the governance interaction is marginally significant and the environmental interaction is insignificant. Although the estimated ESG effect on ROA varies across governance levels, the conditional effects are individually insignificant. The findings highlight the importance of considering ESG performance and corporate governance jointly when evaluating firm performance, while cautioning against assuming automatic financial returns.