The Impact of Corporate Social Responsibility on Financial Performance (Evidence from Publicly Listed Indian Companies)

Abstract

The study investigates the relationship between corporate social responsibility (CSR), and the performance of the publicly listed non-financial firms operating in India. CSR's importance as a strategic component in the corporate world has increased due to increasing demands from various stake holders, instead of just being focused solely on shareholder value. Within the Indian context CSR has been influenced by both voluntary actions by corporations and regulatory requirements; therefore, the environment provides a unique institutional background to determine if there are relationships between sustainable activities and firm performance in an emerging market economy. This study examines whether ESG performance is associated with firm financial performance. ESG performance is represented by the Environmental, Social, and Governance (ESG) composite score, and represents the quantifiable aspect of socially responsible business operations. The theoretical basis for this study is primarily based on Stakeholder theory. Stakeholder theory posits that companies can achieve higher levels of long-term performance through effective management of their stakeholder relationships. However, CSR may also require additional resources and expenditures for compliance purposes; these expenses or investments may not result in immediate benefits to the company financially. The empirical analysis uses a balanced panel of 98 publicly listed non-financial Indian firms from the Nifty 500 Index covering the period 2018 to 2024. In the main specification, ESG performance in year (𝑡 − 1) is matched with financial performance in year 𝑡. Financial performance is measured using Return on Assets (ROA) to capture accounting profitability and the Market-to-Book Ratio (MBR) to capture market valuation. The study estimates fixed-effects panel regression models with firm and year effects, along with firm-level control variables. To check the robustness of the findings, the analysis also uses a two-year lag of ESG, separate ESG pillar scores, and a subsample of large firms. The results do not show statistically significant evidence of a relationship between ESG performance and either accounting-based or market-based financial performance over the sample period. Across the robustness tests, the main conclusions remain broadly unchanged. The research shows that although ESG performance does not contribute significantly to short- to medium-term financial performance, the findings appear to also reflect the same trend regardless of the framework used in this research. The findings of this study in terms of the Indian regulatory climate surrounding CSR indicate that ESG measures represent not only substantive strategic actions but also compliance and disclosure. Overall, this study will further contribute to CSR and financial performance through additional information about CSR–financial performance in the context of regulated emerging markets.