ESG disclosure scores and Indian banks: a search for relevance

The study examines the impact of Environmental, Social and Governance (ESG) disclosures on the key financial metrics of Indian Banks. Theoretical framework provided by agency theory, information asymmetry, stakeholder theory, legitimacy theory, principles of sound ERM for banks is adopted. Sample of 29 Indian banks consisting of public and private sector banks over 2013–2023 is used. Research questions examine the impact of aggregate and disaggregated components of ESG scores on banks' profitability measured as Return on Equity, market risk, cost of funds and credit risk. Panel estimates reveal that there is no significant association between ESG scores and ROE, indicating that ESG integration has not yet translated into measurable profitability improvements for Indian banks. At a disaggregated level, better Governance scores reduce the cost of funds for private banks and that a higher score on the social component is associated with higher credit risk for public sector banks. We find evidence of 'green washing' by Indian PSBs that exhibit lower profitability in the previous year, tend to increase their reported ESG scores in the current year. These results highlight the need for more robust and standardized ESG reporting guidelines, regulatory integration of ESG criteria, enhanced stakeholder education and awareness.