Does Corporate Governance Moderate the Relationship Between ESG Performance and the Financial Performance of Indian Companies?

Abstract

Our study aims to empirically investigate the moderating role of corporate governance factors in the relationship between ESG performance and the financial performance of Indian firms. For this purpose, we have collected five years of data from 2018 to 2022 of the top 100 Bombay Stock Exchange (BSE)-listed companies through Centre for Monitoring Indian Economy (CMIE) prowess and the Bloomberg database. Firm performance is assessed through profitability and value measures, while ESG performance is measured using Bloomberg’s overall ESG score. Board size, frequency of board meetings, independent board, board gender diversity, CEO duality and ownership structure are used as a proxy of corporate governance. We use firm age, firm size, leverage and short-term solvency as control variables. Employing Pooled Ordinary Least Square (OLS), our result shows that out of the different corporate governance variables, only board size significantly moderates the relationship between ESG performance and the financial performance of Indian firms. To the best of our knowledge, this study is one of the limited existing literature that explored the moderating role of corporate governance in the relationship between ESG performance and the financial performance of firms. The findings obtained from our study have practical implications for accounting education and sustainability reporting training, highlighting the need to integrate governance complexity and ESG analysis into accounting curricula. By equipping future professionals with nuanced understanding of ESG dynamics, educators can better prepare students to evaluate non-financial disclosures and governance mechanisms in financial decision-making contexts.