Financial Performance as a Mediator in the ESG–Firm Value Relationship: Insights from Indian Markets

Abstract

Every business today operating in the highly competitive and dynamic environment considers Environmental, Social, and Governance (ESG) as an essential part of its strategy. When aligned well with the company’s business strategies, it helps improve the company’s brand reputation, stakeholder engagement, and ultimately financial performance. The relationship between ESG and firm performance is already a well-researched area, but what remains unexplored is the influence of ESG on firm value. Essentially, firm value is not directly affected by ESG ratings. Instead, ESG first impacts the company's financial performance, which then influences firm value. This study aims to analyze the impact of ESG performance on the firm value of NSE-listed companies in India. Furthermore, the study also aims to assess the mediating role of financial performance in the relationship between ESG performance and firm value among NSE-listed companies. The study examines 157 companies listed on the National Stock Exchange (NSE). The required data was collected from the CMIE Prowess database, NSE website, and the companies’ financial and annual reports. ESG ratings data were obtained from the Bloomberg terminal. The data was collected for 5 years. Results show that ESG performance does not have a direct effect on Firm Value. The results further indicate that financial performance plays a significant mediating role in the relationship between ESG-firm value relationship