Bidirectional association between corporate financial performance and environmental, social, and governance performance

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Abstract

The growing emphasis on sustainability has positioned environmental, social, and governance (ESG) practices as a key driver for businesses seeking long-term value creation. While existing research has extensively analysed the impact of ESG performance (ESGP) on corporate financial performance (CFP), slack resource theory suggests that strong CFP can also enhance ESGP, indicating a two-way relationship (Miralles-Quirós et al., 2019). This study explores this bidirectional dynamic — specifically, the “CFP-ESGP-CFP” link — using a panel dataset of 304 firm-year observations from Indian companies listed on the Nifty100 ESG Index between 2018 and 2022. ESGP is assessed using ESG disclosure scores from the Bloomberg database, while CFP is evaluated through return on assets (ROA) as an accounting-based metric and Tobin’s Q as a market-based measure. Applying correlation analysis and fixed-effect regression models, the findings reveal a positive relationship between CFP and ESGP for market-based measures. However, ESGP negatively affects CFP across both accounting and market metrics. These insights underscore the complex interplay between ESGP and financial outcomes, enriching the discourse on sustainable business practices (Debnath et al., 2024). A key limitation of this study is its focus on Indian firms within the Nifty100 ESG Index, suggesting opportunities for future research to expand into other geographic regions and market indices for broader applicability.

Keywords: Bidirectional Relationship, ESG Performance, ESGP, Financial Performance, Sustainability, Corporate Social Responsibility

Authors’ individual contribution: Conceptualization — P.K., T.K.S., and N.J.; Methodology — P.K., T.K.S., and G.S.K.; Software — P.K., T.K.S., and A.D.; Validation — G.S.K. and N.J.; Formal Analysis — P.K., T.K.S., and A.D.; Investigation — P.K., N.J., and A.D.; Resources — P.K.; Data Curation — P.K. and T.K.S.; Writing — P.K., T.K.S., G.S.K., N.J., and A.D.; Visualization — T.K.S.; Supervision — P.K. and T.K.S.; Project Administration — N.J. and A.D.; Funding Acquisition — T.K.S.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G30, M14, Q56

Received: 25.09.2024
Revised: 10.01.2025; 17.02.2025; 04.04.2025
Accepted: 25.04.2025
Published online: 29.04.2025

How to cite this paper: Kumar, P., Sahoo, T. K., Kafley, G. S., Jhawar, N., & Das, A. (2025). Bidirectional association between corporate financial performance and environmental, social, and governance performance. Business Performance Review, 3(1), 27–36. https://doi.org/10.22495/bprv3i1p3