Corporate Sustainability and Corporate Financial Performance: The Indian Context

Abstract

This paper examines the company specific characteristics that drive companies in India to superior sustainability performance and reporting as proxied by their presence in a new sustainability index introduced in India in 2008 namely, ESG S&P India Index. It further seeks to investigate whether the corporate financial performance (CFP) is impacted by corporate sustainability performance and reporting (CSP). The study uses probit specifications and panel regressions correcting for potential endogeneity. Our findings suggest that the companies which are large in size, have less leverage, are business group affiliated, have higher R&D and advertisement expenses, and are operating in environmentally sensitive industries are likely to be superior in sustainability. Such superior sustainability performance leads to superior financial performance, captured through multiple measures of ROA, ROE and Tobins Q ratio. The study further uses Ohlson (1995)’s model to understand whether the Indian market values CSP and found results in conformity. These findings have important implications not only for the investors, the corporations, and the managers but also for regulatory authorities, governments and various bodies around the world which are trying to create awareness about sustainability, particularly in emerging economies.