Abhisek Mahanta^1,*, Naresh Chandra Sahu¹, Pradeep Kumar Behera¹ and Pushp Kumar²

¹ School of Humanities, Social Sciences, and Management, Indian Institute of Technology Bhubaneswar, Odisha 752050, India

² Department of Economics, Manipal University Jaipur, Jaipur- 303007, Rajasthan, India

* Correspondence:   Email: s22hs09003@iitbbs.ac.in.

Abstract:   We investigated the variations in the corporate financial performance (CFP) of firms that integrate ESG factors into their business practices, focusing on the mediating role of corporate efficiency (CE). Using 909 company-level data, we applied Data Envelopment Analysis (DEA) to measure CE. We examined how these efficiency scores and CFP viz., Return on Assets (ROA), market value, and profit after tax (PAT) are influenced at different levels of ESG. To provide variational and distributional aspects, we employed quantile regression to estimate the relationship between ESG, CE, and CFP across different quantiles. The findings indicated that the impact of ESG integration on efficiency and CFP positively varies across quantiles. Further, a non-linear U-shaped relationship is established between the overall ESG score, environmental score, and social score with the CE. The efficiency initially dips at a lower disclosure score and surges to its highest at a higher disclosure score. Finally, our results revealed that ESG integration brings CE, which in turn channeled into financial outcomes, suggesting that CE plays a crucial mediating role. These results contribute to the understanding of how ESG practices can be leveraged for better financial outcomes through CE. These findings provide companies and policymakers with vital direction, encouraging a focus on robust ESG disclosure in establishing the path toward long-term corporate sustainability and profitability, guided by improved CE.

Keywords:  environmental, social, and governance (ESG); corporate efficiency; corporate financial performance; quantile regression; Data Envelopment Analysis; mediation analysis

JEL Codes: C61, G3, G32, M14, Q01

Abbreviations: ESG: Environmental, social, and governance; CSR: Corporate social responsibility; CE: Corporate efficiency; CFP: Corporate financial performance; DEA: Data Envelopment Analysis; OLS: Ordinary least squares; QR: Quantile regression; RBV: Resource based view; PAT: Profit after tax; ROA: Return on assets; ROE: Return on equity; VRS: Variable Returns to Scale; COGS: Cost of goods sold; R&D: Research and development; DMU: Decision making unit

1. Introduction

In recent times, when it comes to sustainability, discussions primarily revolve around pressing environmental issues like climate change, global warming, resource depletion, etc (Mohieldin et al., 2023). Unsustainable corporate practices, emissions, and overuse of resources have contributed to the current state of environmental degradation. As there is a significant rise in environmental issues like pollution, climate change, global warming, and resource depletion, companies are encouraged to adopt sustainable and environmentally friendly practices. An increase in social issues like human rights, equity, diversity, labor practices, and social inclusion pressured companies to be more transparent and responsible. Contemporary governance issues around board diversity, management compensation, corporate social responsibility (CSR) practices, and firm ethics have now become standard for assessing overall responsibility and accountability. Also, there is ample evidence of CSR in the sphere of international business, which justifies recognizing CSR as an essential component of international corporate governance (Paul, 2024). Thus, the adoption of these sustainable business practices is needed to mitigate sustainability concerns and is currently a top priority in today’s competitive business environment (Sarkar, 2022). In this context, the concept of Environmental, Social, and Governance (ESG) integration has gained significant attention in the field of corporate sustainability. 

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