Over the past decade, sustainability has grown from relative obscurity to occupying a central position in financial markets and regulations. Financial regulators from different jurisdictions have been active in issuing consultation papers and guidelines for regulating Sustainability and ESG. Do more sustainable firms have better financial performance than less sustainable ones? The jury is still out on this, despite a significant quantum of research on the topic. For a set of the largest and listed non-financial firms from NSE100 that account for 50% of the total market capitalisation in India, we find a statistical relationship between corporate sustainability (as measured by ESG ratings) and financial performance (measured by Return on Assets) along with other firm characteristics. Our research uses panel data and a random effects estimator to model the linkages between financial performance, ESG Ratings, and other firm-level parameters. We find statistical evidence of selective accounting, non-accounting parameters, and sustainability measurement impacting firm profitability. Higher sustainability predicates higher profitability for the entire set of 73 firms in our sample. This finding is further supported by a lower level of firm profitability when the data set includes only high fossil-fuel-intensive companies. The research also suggests that manufacturing firms enjoy higher profitability than those in the services sector for the same level of sustainability and other parameters. Evidence indicates that MNCs score better on profitability vis a vis PSU and Indian-family-owned firms for the same level of sustainability. The findings of our econometric modelling have significant learnings for the 1000 largest firms in India for making strategic choices to balance sustainability and financial performance for complying with ESG and BRSR norms. With India becoming one of the first countries to notify regulations for measurement and disclosure of ESG (through ESG ratings, BRSR formats, and guidelines for ESG funds), it becomes critical for firms and investors to understand the causation and materiality of various financial/non-financial parameters from an ESG and performance perspective. As the BRSR-based disclosures stabilise over the next few years, the investor community will have access to several parameters of corporates that were hitherto not measured or were under wraps. The research also suggests that ESG Rating methodologies and regulations will need to be tweaked in line with new data, uncovered linkages, and nuanced indicators of materiality.


Keywords: Environment; Social; Governance; ESG Rating; Sustainability; Materiality; BRSR.