Abstract This study investigates the linkage between sustainable business practices and corporate profitability by estimating the impact of environmental, social and governance (ESG) adoption on firm performance in emerging economies. With ESG reporting and responsible investment frameworks picking up globally, there is rising pressure on emerging market firms from investors, regulators, lenders, and other stake holders to assimilate sustainability into business strategy and disclosure. Simultaneously, the potential profit effects of ESG adoption are still controversial, especially because, in developing countries, the impact of institutional quality, reporting maturity, capital market development, and legislative inspection vary widely. On this basis, the present study examines the proposition that the adoption of ESG helps organizations achieve better financial performance and whether this relationship varies by sector, governance, or organization characteristics. Adopting an empirical research design the study suggests a panel-data approach to analysis of listed firms from selected emerging economies over a recent multi-year period. Adoption of ESG is measured using firm-level ESG scores, sustainability reporting indicators, or some disclosure-based proxies; while corporate profitability is measured through accounting-based and market-based measures such as return on assets, return on equity, Tobin’s Q, and operating margin. The analysis includes firm size, leverage, industry, growth, liquidity, and macro-institutional factors as control variables. Based on stakeholder theory, legitimacy theory, and resource-based view, the article investigates the potential for ESG adoption to serve a similar strategic role as other types of competitive capabilities by improving firms' resiliency, reputation, and long-term financial performance. The researchers also contend that the impact of ESG adoption on profitability is positive for emerging economies, but the strength and sign of the impact depend on three conditional factors: institutional context, disclosure credibility and sustainability governance maturity. It adds to the literature by providing an empirically informed evaluation of ESG-performance connections across settings, where evidence is still relatively underdeveloped and mixed (e.g., via having investigated fewer sectors). It is anticipated that the findings will help managers, investors, regulators and scholars to understand the strategic and financial and implications of sustainable business practices within an emerging-market setting.
Shrikant L Patil (Thu,) studied this question.