Sustainable Finance and ESG Integration: Evidence, Contradictions, and Long-Term Performance Implications in India

Abstract

One of the most significant aspects of sustainable finance discussions today is the incorporation of Environmental/ Social/ Governance (ESG) criteria as part of corporate finance, especially within developing markets. This research focuses on how there could be a link between integrating ESG into corporate finance and the Corporate Financial Performance (CFP) of Indian Stock Exchange-listed companies by addressing both the conflicting evidence as well as non-linear performance trajectories seen in the body of literature. A purposive sample of ten BSE/NSE-listed organizations from five different sectors (Information Technology, Banking, Telecommunications, Energy, and Manufacturing) for the period of FY 2021 through FY 2025 will be used in this research. Descriptive statistics, Spearman rank correlation, and the Mann-Whitney U non-parametric test will be utilized to analyze the FP of high ESG adopters (ESG score ≥ 70) against low ESG adopters (ESG score ≤ 60). ROE, ROA, and CoD will be utilized to measure FP. High ESG adopters show a statistically significant difference in their return on assets (ROA) (Mean=13.18% vs. 4.64%) at the 0.007 level of significance while having a statistically significant difference in their cost of debt (Mean =7.83% vs 11.72%) at the less than 0.001 level of significance. The statistically significant difference in return on equity (ROE) (p=0.005) is also influenced by industry capital intensity and short-term costs associated with transitioning to ESG compliance. The correlation between ESG score and ROA is 0.72 (p=0.003), and the correlation between ESG score and cost of debt is -0.79 (p<0.001), indicating a strong negative relationship between ESG quality and financial risk. The findings provide firm-level results over time and by sector to the sustainable finance literature in India, as well as identifying situations in which the ESG return is non-linear. There are implications for corporate managers, policymakers and investors from these findings.