There seems to be a growing demand for companies to disclose information about natural, human, and financial resources used by them and its implications on environment and society. This gives rise to ESG metrics and related corporate reporting in their annual reports. The study aims to examine the relationship between internal and external sources of funds and the environmental, social, and governance score. The study is based on a sample of Nifty 50 companies listed on the National Stock Exchange of India, consisting of 245 observations. The study period was 5 years starting from 2017 to 2021. The variables studied were debt-equity ratio; retained earnings; and environmental, social, and corporate governance performance (ESG score). The study provides evidence of a negative relationship between debt-equity ratio and ESG score. The practical implication of the study is taken from the findings that it is high time for the firms to pay more attention towards improving their ESG score by taking up more sustainable projects through compliance of regulations in their business decisions.
TopIntroduction
The concept of sustainability, initially introduced within the environmental context during United Nations Conferences in the 1970s and 1980s, has proliferated in significance within the realms of Economic and Financial Literature (Tiwari, 2022). Looking ahead, it is increasingly probable that both governmental and private investment decisions regarding industrial projects will take into account their environmental impacts, emphasizing the enduring ecological sustainability of such endeavors. Consequently, sustainable finance is poised to become an integral facet of the financial industry's modus operandi (Wilson, 2010).
In the domain of finance, it is imperative to broaden the perspective beyond profitability. Environmental and social challenges must be accorded due consideration. Hence, the paradigm of sustainable finance seamlessly integrates environmental, social, and governance (ESG) criteria into financial decision-making processes (Saidane & Ben Abdallah, 2021). Sustainable finance, a comprehensive term, encompasses various other concepts such as green financing and responsible investment, which fundamentally hinge on the bedrock of Corporate Social Responsibility. Extensive research has already been conducted on green financing and responsible investment. Thus, this research endeavors to pivot the spotlight squarely onto the environmental, social, and governance parameters that constitute the bedrock of sustainable finance.
In tandem with this shift, there has been a discernible uptick in the demand for companies to divulge comprehensive information pertaining to the natural, human, and financial resources they harness, as well as the ensuing implications for both the environment and society at large. This burgeoning necessity has given rise to the formulation of ESG metrics and their subsequent incorporation into corporate reporting practices within annual reports. However, the imperative goes beyond mere disclosure; it becomes incumbent upon companies, investors, stock exchanges, and other stakeholders to pivot towards meaningful, standardized disclosures. This shift is aimed at instilling transparency, reliability, and integrity within the domain of corporate reporting (Kotsantonis & Serafeim, 2019).
The significance of ESG scores in influencing a company's valuation cannot be overstated. Favorable ESG scores can wield a positive impact on a firm's value, culminating in an augmented overall valuation. Conversely, low ESG scores have the potential to yield adverse effects, leading to a diminution in the firm's value (Melinda & Wardhani, 2020). Thus, the value of a firm is inevitably intertwined with its ESG score. For companies charting a course toward sustainable growth and enduring success, it is imperative to accord this metric the seriousness it merits. It is worth noting, however, that while ESG scores manifest a positive impact on a firm's value, the inverse holds true in the case of profitability. A study suggests that an augmentation in ESG scores may potentially lead to a reduction in profitability (Shaista Wasiuzzaman, Salihu Aramide, Ibrahim, Farahiyah Kawi, 2022).
This study embarks upon a nuanced exploration of the interplay between capital structure decisions and the non-financial performance of companies, with a particular emphasis on ESG parameters. By dissecting the intricate web of relationships between financial structures, sustainable practices, and organizational performance, this research endeavors to shed light on the underlying mechanisms that underpin the broader shift towards sustainable finance and responsible investment. Through a meticulous examination of empirical data and rigorous analytical frameworks, this study seeks to equip industry stakeholders, policy makers, and academics with the insights necessary to navigate the evolving landscape of financial decision-making in an increasingly sustainability-conscious world.