Finance Research Letters 56 (2023) 104093

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Finance Research Letters

journal homepage: www.elsevier.com/locate/frl

Good for the planet, good for the wallet: The ESG impact on
financial performance in India
Amar Rao a, Vishal Dagar b, Kazi Sohag c, *, Leila Dagher d, Tauhidul Islam Tanin e
a
Faculty of Management Sciences, Shoolini University of Biotechnology and Management Sciences, Solan, Himachal Pradesh - 173212, India
b
Great Lakes Institute of Management, Gurgaon 122413, Haryana, India
c
Graduate School of Economics and Management, Ural Federal University, Yekaterinburg, 30000 Russia
d
American University of Beirut, Beirut, Lebanon
e
Department of Finance and Business Economics, EGADE Business School, Tecnológico de Monterrey, Mexico

A R T I C L E I N F O A B S T R A C T

Keywords: We examine the impact of environmental, social, and governance (ESG) practices on financial
Beta performance among Nifty 50 companies in India from 2015 to 2022. Using fixed-effects panel
ESG quantile regression, we observe that the relationship between ESG practices and financial prof­
Return on Equity
itability varies across the return on equity (ROE) distribution. While the environmental pillar
India.JEL Classification: G30, G32, G38, Q56
score and the governance pillar score consistently negatively impact ROE across almost all
quantiles with high statistical significance, the social pillar score exhibits mostly an insignificant
relationship. Its impact is negative but only mildly statistically significant in the lower end of the
ROE distribution. The findings and their implications are important to investors, corporate ex­
ecutives, and policymakers.

1. Introduction

Environmental, social, and governance (ESG) practices have been gaining importance in recent years. Corporations have been
actively incorporating ESG principles into their operations to address global concerns (Alsayegh et al., 2020). Naturally, Indian
businesses are also aligning their practices with global directions and the country’s vision of sustainable growth (Pillai, 2017; Singh
et al., 2018).
Recent work has uncovered a clear correlation between strong ESG performance and positive financial outcomes, including higher
return on equity (ROE), improved cost of capital, and enhanced stock price performance. See, for example, Bodhanwala and Bod­
hanwala (2023); Maji and Lohia (2023); Parikh et al., (2023); Shanaev and Ghimire (2022); Sinha Ray and Goel (2023), and Wong
et al., (2021). In a related stream of literature, several studies have investigated the impact of ESG scores and ratings on lending
institutions and portfolio allocation. See, for example, Citterio and King (2023), De Spiegeleer et al. (2021), Eliwa et al., (2021),
Khemir et al., (2019), and Li et al., (2022).
According to a review by Whelan et al., (2021) of over 1000 studies published between 2015 and 2020, most studies examining
operational metrics like ROE, ROA, or stock price found a positive relationship between ESG factors and financial performance. More
specifically, 58% of the studies showed a positive association, 13% had a neutral impact, 21% yielded mixed results, and only 8%
showed a negative relationship. The relationship between ESG and firm value has been linked to several existing theories such as the

* Corresponding author.
E-mail address: [email protected] (K. Sohag).

https://doi.org/10.1016/j.frl.2023.104093
Received 20 April 2023; Received in revised form 30 May 2023; Accepted 5 June 2023
Available online 7 June 2023
1544-6123/© 2023 Elsevier Inc. All rights reserved.
A. Rao et al. Finance Research Letters 56 (2023) 104093

stakeholder theory, the shared value concept, the legitimacy theory and the resource-based theory.
Despite the expanding literature, very few studies have investigated the connection between ESG activities and financial perfor­
mance in the Indian context. India is the world’s fifth-largest economy and a rapidly developing nation that faces unique environ­
mental, social, and governance challenges (Narula, 2012; Palmate et al., 2021). Given the heightened emphasis on ESG factors,
transparency, accountability, and ethical conduct among Indian businesses, it is crucial to understand the link between ESG ratings and
financial performance. Motivated by the growing importance of ESG factors in the corporate landscape, the study’s main contribution
is to shed light on the interplay between ESG practices and financial outcomes of businesses operating in the context of a rapidly
developing and growing economy. The quantile regression framework employed allows for a nuanced understanding of the impact of
ESG factors at various levels of financial performance, offering a more comprehensive assessment of the association. The findings of
this study will contribute to academic literature and offer practical implications for Indian policymakers, investors, and corporate
executives.
The main research question can be summarized in the following hypothesis:
H1: No significant link exists between a firm’s ESG score and its financial performance across all quantiles.
Which can be further subdivided into the following three components:
H1a: No significant link exists between a firm’s Environmental Pillar Score (eps) and its financial performance across all quantiles.
H1b: No significant link exists between a firm’s Social Pillar Score (sps) and its financial performance across all quantiles.
H1c: No significant link exists between a firm’s Governance Pillar Score (gps) and its financial performance across all quantiles.
The remainder of the paper is structured as follows. Section 2 provides a description of the data and the methodology, while
Section 3 summarizes the results and offers insights about the findings. Finally, section 4 concludes with some remarks and policy
implications.

2. Data and methodology

2.1. Data

The Nifty 50 index is the benchmark indicator for the Indian stock market, tracking the performance of 50 of the largest Indian
companies listed on the National Stock Exchange (NSE). It is worth noting that these companies constitute 50–60% of the total market
capitalization of all NSE-listed companies. Lately, we find a notable increase in ESG disclosure among these firms, resulting in a
reasonable dataset of the Nifty 50 companies spanning the timeframe 2015–2022. By examining these data, we can gain insights into
the ESG practices and financial performance of the top companies in the Indian stock market. The Refinitiv Eikon Database serves as
the source for all variables used in this study, which are described in Tables 1 and 2.
The mean values for the financial variables imply that the companies in the dataset generally have profitable operations. The
negative mean beta indicates that the stocks move inversely to the market. The average debt-to-equity ratio is relatively high, sug­
gesting that the companies typically have higher debt levels than their equity. The wide range between maximum and minimum values
for specific variables like beta and debt-to-equity ratio is a good indication that the dataset includes diverse companies with varying
financial characteristics. The variables, debt-to-equity ratio and total assets, have the highest standard deviations, highlighting more
significant variation compared to other variables. All variables exhibit non-normal distributions.

Table 1
Definition of Variables.
Label Variable N Brief Use

ROE Return on Equity 384 Profitability relative to shareholder’s equity Measures a company’s financial performance and effectiveness
in using shareholder equity
SPS Social Pillar Score 384 Quantifies the company’s social performance Evaluates a company’s social responsibility and its impact on
stakeholders
GPS Governance Pillar 384 Evaluates the company’s governance practices Assesses a company’s governance structure and its ability to
Score mitigate risks
EPS Environmental Pillar 384 Assesses the company’s environmental Analyzes a company’s commitment to environmental
Score performance sustainability and risk management
TA Total Assets 384 Proxy for the size of the firm Represents the scale of a company’s operations and its financial
resources
BETA Beta 384 Measures stock’s sensitivity to market movements Indicates the systematic risk associated with a company’s stock
PCF Price to Cash Flow per 384 Valuation metric comparing stock price and cash Helps investors evaluate a stock’s attractiveness based on cash
Share flow flow generation
DE Total Debt Percentage 384 Indicates the proportion of debt financing relative Provides insight into a company’s capital structure and financial
of Equity to equity leverage
AGE Date of Incorporation 384 Indicates the age of the company from the date of It is typically measured in years and is often used as a metric to
incorporation assess the company’s experience, stability, and growth potential.
SIZE Market Capitalization 384 Calculated by multiplying the company’s share Commonly used as a metric to assess the size and relative value
price by the total number of outstanding shares. of a company.

Notes: N= Total number of observations for panel data; annual frequency 2015–2022 for 48 listed companies in benchmark equity index NIFTY of
National Stock Exchange.

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A. Rao et al. Finance Research Letters 56 (2023) 104093

Table 2
Descriptive Statistics.
Mean Median Max Min Std. Dev. Skew. Kurt. JB

ROE 2.71 2.77 4.75 -1.35 0.82 -1.11 6.78 301.12***

EPS 3.70 4.00 4.58 -0.21 0.98 -2.40 8.72 872.68***
GPS 3.88 4.01 4.66 0.00 0.57 -2.15 13.17 1911.79***
SPS 4.07 4.21 4.57 -1.95 0.61 -5.15 40.91 24,183.14***
AGE 1.59 1.56 2.06 0.90 0.24 0.06 2.25 9.16***
BETA -0.17 -0.07 0.85 -3.82 0.68 -1.79 8.43 663.65***
DE 3.25 3.99 6.32 -3.77 2.07 -0.91 3.03 52.05***
PCF 2.86 2.89 5.63 0.10 0.89 -0.04 2.67 1.77
SIZE 12.06 12.07 13.24 10.73 0.40 -0.08 3.61 6.17
TA 27.43 27.47 31.61 23.71 1.49 0.08 2.80 1.07

Notes: ***, **, * indicate P<0.01, P<0.05, and P<0.1, ROE = Return on Equity, EPS= Environmental Pillar Score, GPS= Governance Pillar Score, SPS
= Social Pillar Score, TA = Total Assets, BETA = Beta, PCF = Price to Cash Flow per Share, DE = Total Debt Percentage of Equity, AGE= Age of
company, SIZE = Market Capitalization.

2.2. Methodology

We apply the fixed-effects panel quantile regression model using the method of moments (MMQReg) suggested by Machado and
Silva (2019). Due to its flexibility and efficiency, the MMQReg method is useful in finance applications and enables the estimation of
conditional quantiles that help in understanding the impact of ESG pillars on different ROE components. MMQReg is preferred over
traditional methods of regression; the latter models have limitations in modeling the conditional mean of the response variable while
the former allows for the entire distribution. The MMQReg approach generates distinct effects across quantile positions of the
dependent variable. Firstly, the fixed-effects panel quantile regression model helps address unobserved heterogeneity and controls for
time-invariant effects, enhancing the internal validity of the analysis. Secondly, it helps handle endogeneity concerns by incorporating
fixed effects. Additionally, by not making any distribution assumptions about the error term, MMQReg accommodates hetero­
scedasticity, while providing quantile-specific effects, which allow for a more comprehensive understanding of the relationship. The
method estimates the conditional quantile Q Y (τ /X) for a location-scale model as

(1)
′ ′
Q Y (τ / Xit ) = αi + δi qi(τ) + Xit φ + Zit γq(τ)

where Xit is a vector of regressors, and αi + δiqi(τ) is the scalar coefficient of the quantile τ fixed effect at τ, which are time-invariant
′

parameters whose heterogeneous effects are allowed to vary across the quantile of Y.
The equations for all three hypotheses are as follows:
For the social pillar score,
Qθ (ROEit ) = ατ + β1τ SPSit + β2τ TAit + β3τ Bit + β4τ PCFit + β5τ DEit + β6τ AGEit + β7τ SIZEit + εit (2)

For the environment pillar score,

Qθ (ROEit ) = ατ + β1τ EPSit + β2τ TAit + β3τ Bit + β4τ PCFit + β5τ DEit + β6τ AGEit + β7τ SIZEit + εit (3)

For the governance pillar score,

Qθ (ROEit ) = ατ + β1τ GPSit + β2τ TAit + β3τ Bit + β4τ PCFit + β5τ DEit + β6τ AGEit + β7τ SIZEit + εit (4)
In this study, ROE is the dependent variable, while EPS, SPS, GPS, TA, BETA, PCF, and DE are the key independent variables.
Additionally, AGE and SIZE are included as control variables.

2. Empirical results and discussion

In this section, we present the key results from quantile regression.1

Table 3 presents the results of a quantile regression analysis with the dependent variable being returns on equity and SPS as one of
the independent variables. The table includes the estimated coefficients for SPS as well as several other variables: Total Assets (TA),
Beta (BETA), Price to Cash Flow per Share (PCF), Total Debt Percentage of Equity (DE), Age of the company (AGE), and Market
Capitalization (SIZE). At the 5th quantile level, a higher SPS is found to have a negative and statistically significant effect on ROE.
The coefficients for TA, DE, and SIZE are also negative and statistically significant, indicating that higher values of these variables
are associated with lower ROE. Moving to the 10th quantile level, the relationship between SPS and ROE becomes statistically
insignificant. TA, DE, and SIZE continue to have negative and significant effects on ROE. BETA and PCF now exhibit negative effects on

1
All diagnostic tests including unit root tests were conducted to ensure the adequacy and validity of our findings. The diagnostic test results are
available from the authors upon request.

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A. Rao et al. Finance Research Letters 56 (2023) 104093

Table 3
Regression Results for Social Pillar Score (SPS).
Quantile SPS TA BETA PCF DE AGE SIZE

5 -0.105* -0.376*** -0.057 -0.161** -0.056*** -0.257* 1.0593***

10 -0.126 -0.483*** -0.042 -0.279** -0.091** -0.753*** 1.392***
20 -0.117 -0.438*** -0.048 -0.229*** -0.076*** -0.544** 1.252***
30 -0.111 -0.406*** -0.053 -0.194*** -0.065*** -0.395** 1.152***
40 -0.107* -0.386*** -0.056 -0.172*** -0.059*** -0.302* 1.08***
50 -0.103* -0.368*** -0.058 -0.152*** -0.053*** -0.219 1.034***
60 -0.099* -0.349*** -0.061 -0.132*** -0.047*** -0.134 0.976***
70 -0.097* -0.336*** -0.063 -0.117** -0.042** -0.0736 0.935
80 -0.092 -0.311*** -0.066 -0.0897* -0.0343* 0.0447 0.856***
90 -0.086 -0.284*** -0.07 -0.06 -0.0254 0.168*** 0.772
95 -0.081 -0.257*** -0.073 -0.032 -0.0169 0.2864 0.693***

Notes: ***, **, * indicate P<0.01, P<0.05, and P<0.1; ROE = Return on Equity, SPS = Social Pillar Score, TA = Total Assets, BETA = Beta, PCF = Price
to Cash Flow per Share, DE = Total Debt Percentage of Equity, AGE= Age of company, SIZE = Market Capitalization.

ROE with varying levels of significance, suggesting that these variables may play a role in explaining variations in ROE at this quantile
level. Similar patterns persist across the subsequent quantile levels. SPS, TA, DE, and SIZE consistently demonstrate negative and
statistically significant effects on ROE, indicating their importance in explaining the variations in ROE across different quantiles. BETA
and PCF show mixed significance, being statistically significant at some quantile levels but not at others. The variable AGE appears to
have a statistically significant relationship with ROE from lower to middle quantile levels, suggesting that it may significantly in­
fluence ROE in this analysis. However, it is important to note that the coefficient for AGE is negative at some quantile levels, indicating
a potential inverse relationship with ROE, albeit not statistically significant. In summary, the results suggest that SPS is negatively
associated with the ROE at certain quantile levels. Additionally, variables such as Total Assets (TA), Total Debt Percentage of Equity
(DE), and Market Capitalization (SIZE) consistently show negative relationships with ROE across various quantile levels. Beta (BETA)
and Price to Cash Flow per Share (PCF) exhibit mixed significance in explaining variations in ROE.
Agarwal et al., (2023) found a negative association between ESG activities and FP in a sample of 33 pharmaceutical companies.
However, when competition was introduced as a moderating variable, the relationship between ESG and FP turned positive. This
suggests that competition can help to mitigate the negative impact of ESG activities on FP. Sinha Ray and Goel (2023) found that ESG
scores have a positive impact on financial performance indicators such as ROA, ROE, firm size, market capitalization, PBDIT, Tobin’s
Q, and share price. However, this impact is not immediate and shows a time lag. The study also reveals a long-term positive association
between ESG disclosure and annual average share price in developing economies like India. Sharma et al., (2020) found a positive and
significant association between financial and market performance and the level of ESG disclosure. On the other hand, FIIs stake and
leverage showed a negative and significant association with the level of ESG disclosures.
The negative association between SPS and ROE suggests that companies with higher SPS scores tend to have lower ROEs. This may
be because companies that are more focused on social responsibility may be less focused on maximizing profits. Alternatively, it may
be that companies that are more focused on social responsibility are more likely to invest in long-term projects that have lower returns
in the short term. The results of this study suggest that there may be a trade-off between social responsibility and profitability.
Companies that are more focused on social responsibility may be less profitable in the short term. However, they may be more
profitable in the long term if they are able to build a strong reputation for social responsibility. These findings provide valuable insights
into the impact of the Social Pillar Score and other financial factors on a firm’s profitability at different quantile levels.
Table 4 presents the results of a quantile regression analysis with the dependent variable being returns on equity and EPS as one of
the independent variables. The table includes the estimated coefficients for EPS as well as several other variables: Total Assets (TA),
Beta (BETA), Price to Cash Flow per Share (PCF), Total Debt Percentage of Equity (DE), Age of the company (AGE), and Market

Table 4
Regression Results for Environment Pillar Score (EPS).
Quantile EPS TA BETA PCF DE AGE SIZE

5 -0.126*** -0.387*** -0.0392 -0.191*** -0.0495** -0.170 1.123***

10 -0.183*** -0.476*** -0.046 -0.300*** -0.097*** -0.580** 1.446***
20 -0.157*** -0.435*** -0.0432 -0.250*** -0.075*** -0.392* 1.298
30 -0.143*** -0.413*** -0.041 -0.223*** -0.063*** -0.291 1.21***
40 -0.134*** -0.399*** -0.0402 -0.2066*** -0.0563*** -0.228 1.169***
50 -0.122*** -0.381*** -0.0387 -0.184*** -0.046*** -0.146 1.104***
60 -0.111*** -0.364*** -0.0373 -0.163*** -0.037** -0.067 1.043***
70 -0.103*** -0.352*** -0.0363 -0.148*** -0.0308*** -0.0109 .998
80 -0.089*** -0.330*** -0.0345 -0.122** -0.0193 .0867 .922
90 -0.0753** -0.308*** -0.0326 -0.095 -0.007 .189 .841
95 -0.063 -0.290*** -0.031 -0.072 0.002 0.273 0.775***

Note: ***, **, * indicate P<0.01, P<0.05, and P<0.1; ROE = Return on Equity, EPS = Environment Pillar Score, TA = Total Assets, BETA = Beta, PCF
= Price to Cash Flow per Share, DE = Total Debt Percentage of Equity, AGE= Age of company, SIZE = Market Capitalization.s.

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A. Rao et al. Finance Research Letters 56 (2023) 104093

Capitalization (SIZE). At the 5th quantile level, a higher EPS is found to have a negative and statistically significant effect on ROE.
The coefficients for TA and DE are also negative and statistically significant, indicating that higher values of these variables are
associated with lower ROE. The coefficient for AGE is not statistically significant, and the coefficient for SIZE is positive and statis­
tically significant for 5th, 10th, 30th, 40th, 50th, 60th and 95th quantile. Moving to the 10th quantile level, the relationship between
EPS and ROE remains negative and highly significant. TA, DE, and AGE also display negative and statistically significant effects on
ROE. BETA and PCF continue to have negative effects on ROE, but their significance levels vary. Similar patterns persist across the
subsequent quantile levels. EPS, TA, DE, and AGE consistently demonstrate negative and statistically significant effects on ROE,
suggesting their importance in explaining variations in ROE across different quantiles.
The negative association between EPS and ROE suggests that companies with higher EPS scores tend to have lower ROEs. This may
be because companies that are more focused on environmental responsibility may be less focused on maximizing profits. Alternatively,
it may be that companies that are more focused on environmental responsibility are more likely to invest in long-term projects that
have lower returns in the short term. These findings contribute to our understanding of how the Environment Pillar Score and other
financial factors influence a firm’s profitability at different quantile levels. Jyoti and Khanna (2021) found a significant negative
relationship between the Environment score and the Return on Assets (ROA) and Return on Capital Employed (ROCE) of service sector
companies listed on the Bombay Stock Exchange.
Table 5 presents the results of a quantile regression analysis with the dependent variable being returns on equity and GPS as one of
the independent variables. The table includes the estimated coefficients for GPS as well as several other variables: Total Assets (TA),
Beta (BETA), Price to Cash Flow per Share (PCF), Total Debt Percentage of Equity (DE), Age of the company (AGE), and Market
Capitalization (SIZE).
The results reveal that the coefficient for GPS is consistently negative and statistically significant across multiple quantiles. This
suggests that a higher GPS score is associated with a decrease in ROE. Specifically, at the 5th, 20th, 30th, 40th, 50th, 60th, 70th, 90th,
and 95th quantiles, the negative relationship between GPS and ROE remains statistically significant. Furthermore, the magnitude of
the coefficient increases as the quantile level rises, indicating a stronger impact of governance on ROE with higher GPS scores. The
results of this study suggest that there may be a trade-off between corporate governance and profitability. Companies that have better
corporate governance may be less profitable in the short term. However, they may be more profitable in the long term if they are able to
build a strong reputation for corporate governance. One potential explanation is that companies with stronger corporate governance
practices prioritize long-term investments over short-term gains. These investments may initially yield lower returns but have the
potential for higher profitability in the future. By focusing on long-term strategies and sustainability, these companies may sacrifice
immediate profitability, leading to a negative association between GPS and ROE. Another possible explanation is that companies with
robust corporate governance structures incur additional costs related to regulatory compliance and ethical practices. These costs, such
as implementing governance frameworks, conducting regular audits, and maintaining transparency, can reduce their overall profit­
ability. Therefore, the negative relationship between GPS and ROE could be attributed to the trade-off between adherence to corporate
governance standards and short-term financial performance. These findings highlight the importance of governance practices in
influencing a company’s financial performance. The negative coefficients suggest that companies with higher GPS scores tend to
exhibit lower levels of ROE. These results contribute to our understanding of the complex relationship between governance and
financial outcomes, emphasizing the significance of governance considerations for investors, policymakers, and practitioners.
Fig. 1 depicts the quantile plots illustrating the coefficients of the key variables, namely the SPS, the EPS, and the GPS. These
coefficients serve as indicators of the estimated relationships between the respective pillar scores and the dependent variable. The
chosen quantiles for analysis include the 10th, 30th, 50th, 70th, and 90th, representing various segments of the data distribution.
Examining the y-axis, which represents the coefficients, noteworthy patterns emerge across the quantiles for the three variables.
Notably, the magnitude of the SPS coefficient diminishes as the quantiles progress. This implies that a higher SPS score exerts a
relatively greater influence on the dependent variable in lower quantiles compared to higher ones. Consequently, the impact of social
responsibility on the dependent variable becomes less pronounced as quantiles increase. Likewise, the EPS coefficient exhibits a
decreasing trend in magnitude with advancing quantiles. This indicates that a higher EPS score holds a stronger impact on the

Table 5
Regression Results for Governance Pillar Score (GPS).
Quantile GPS TA BETA PCF DE AGE SIZE

5 -0.227*** -0.396*** -0.086 -0.127** -0.042** -0.309** 1.057***

10 -0.178 -0.519*** -0.072 -0.273** -0.068* -0.777** 1.485***
20 -0.199* -0.466*** -0.078 -0.210** -0.057* -0.577** 1.301***
30 -0.216*** -0.424*** -0.083 -0.160** -0.048** -0.415** 1.153***
40 -0.226*** -0.401*** -0.085 -0.132** -0.043** -0.326** 1.072***
50 -0.231*** -0.386*** -0.087* -0.115** -0.040** -0.272* 1.022***
60 -0.239*** -0.368*** -0.089* -0.093** -0.0361** -0.201 .958***
70 -0.247*** -0.347*** -0.091** -0.068 -0.0316* -0.121 .885***
80 -0.254 -0.329 -0.093 -0.046 -0.0277 -0.052 0.822
90 -0.267*** -0.296*** -0.097* -0.007 -0.0207 0.073 .706***
95 -0.278*** -0.269*** -0.100 -0.257 -0.148 0.178 0.611***

Notes: ***, **, * indicate P<0.01, P<0.05, and P<0.1; ROE = Return on Equity, GPS = Governance Pillar Score, TA = Total Assets, BETA = Beta, PCF
= Price to Cash Flow per Share, DE = Total Debt Percentage of Equity, AGE= Age of company, SIZE = Market Capitalization.

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A. Rao et al. Finance Research Letters 56 (2023) 104093

Fig. 1. Quantile plots for SPS, EPS, and GPS.

dependent variable in lower quantiles, while its influence wanes in higher quantiles. This suggests that the relationship between
environmental responsibility and the dependent variable weakens as quantiles increase. Conversely, the GPS coefficient displays an
increasing magnitude as the quantiles increase. This signifies that a higher GPS score possesses an increasingly stronger influence on
the dependent variable as quantiles rise. The expanding magnitude of the GPS coefficient underscores the heightened significance of
governance practices in impacting the ROE in higher quantiles.

3. Conclusion and policy implications

The study investigates the nexus between ESG practices and financial profitability of the Nifty 50 companies listed on India’s NSE
for the period 2015 and 2022, utilizing data from Refinitiv Eikon. The findings of the regression analysis have significant implications
for investors, corporate executives, and policymakers across various quantiles. For investors and corporate executives, it is crucial to
consider the impact of social responsibility on profitability. Specifically, at the 5th quantile level, higher scores in the SPS are asso­
ciated with lower short-term ROE. However, companies with higher SPS scores have the potential to establish a strong reputation for
social responsibility, leading to long-term benefits. Similarly, the negative relationship between the EPS and ROE at the 5th quantile
level suggests that companies prioritizing environmental responsibility may experience reduced short-term profitability. Thus, in­
vestors need to carefully assess the trade-off between environmental responsibility and profitability, taking into account the potential
long-term advantages of environmentally conscious practices. With respect to corporate governance, the consistently negative asso­
ciation between the GPS and ROE across multiple quantiles indicates a trade-off between governance and profitability. Investors
should acknowledge that companies with stronger governance practices may sacrifice short-term profitability for long-term gains and
reputation. Consequently, when making investment decisions, it is vital to evaluate the equilibrium between governance and
profitability.
From a policymaking perspective, these findings offer valuable insights. Policymakers should carefully consider the balance be­
tween social responsibility and profitability when formulating regulations and frameworks. While encouraging companies to prioritize
social responsibility is essential, policymakers must ensure that the implemented measures do not excessively burden companies with
short-term profitability challenges. Similarly, policies promoting environmental responsibility should be designed to strike a balance
between sustainability objectives and short-term profitability concerns. Policymakers need to recognize that companies with robust
governance practices might face short-term profitability constraints. Hence, it is crucial to strike a balance by promoting effective
governance structures while providing support and incentives to mitigate potential negative impacts on short-term profitability. Ul­
timately, policymakers should aim to create an environment that fosters sustainable and responsible business practices, while
considering the economic implications for companies. Given the intricate relationships between social responsibility, environmental

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A. Rao et al. Finance Research Letters 56 (2023) 104093

responsibility, corporate governance, and profitability, policymakers must adopt a nuanced approach to policymaking, ensuring long-
term sustainability and economic growth.

CRediT authorship contribution statement

Amar Rao: Conceptualization, data collection, empirical analysis

Vishal Dagar: Literature review, writing and editing.
Kazi Sohag: Investigation, Supervision.
Leila Dagher: Supervision, analysis, validation and editing
Tauhidul Islam Tanin:Writing, reviewing, editing, and validation.

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to
influence the work reported in this paper

Data availability

Data will be made available on request.

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