ESG (Environmental, Social, and Governance) and firm value:

mediating effect of Profitability Performance of Indian-Listed

Companies
Khajabee Pathan
VIT AP School of Business, VIT-AP University
Madhusmita Mohanty

VIT AP School of Business, VIT-AP University

Article

Keywords: Environmental, social and governance, Enterprise value, & PMG-ARDL, India

Posted Date: June 3rd, 2025

DOI: [Link]

License:   This work is licensed under a Creative Commons Attribution 4.0 International License. Read Full License

Additional Declarations: No competing interests reported.

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Abstract
We investigate the indirect relationship between ESG (environmental, social, and governance) and a firm’s Enterprise value,
with profitability measures (Return on Assets (ROA), Return on Equity (ROE), and Return on Capital Employed (ROCE)) as
mediating factors. The study utilizes the annual data of 124 firms of different sectors of publicly listed Indian enterprises
spanning the years 2019-2023, utilizing the panel PMG-ARDL model, and for the mediation analysis, the Sobel test was
conducted. We find the mediating relationship between ESGP and EV through ROA and ROCE. the result also shows the
significant long-run effect of Explanatory variables on response variables. Based on the findings, this study offers insights
tostakeholders, decision-makers, legislators, and researchers on the role of ESG in the Firm’s value.

1. Introduction
The Financial Times Lexicon states that ESG is "a broad term employed in capital markets and by shareholders to assess
corporate behavior and predict how well companies will do financially in the future” (1). ESG encompasses a wide range of
topics including environmental concerns such as climate change, energy and water usage, and carbon emissions, social
responsibility concerns like fair trade, human rights, product safety, gender equality, and health and safety, and corporate
governance matters such as board independence, corruption and bribery, reporting and disclosure, and shareholder
protection (2). Furthermore, a wider range of credit rating firms in the market employ ESG assessment approaches to
evaluate organizations. The rating data illustrates the preference of organizations to allocate resources towards
sustainability and shift their practices from adversely impacting to being environmentally friendly (3). Sustainable financing
has emerged as the current edge of global spending, improving performance beyond profitability (4). Developed economies,
on the one hand, have a greater interest in ESG issues, while developing countries are still in the stage of gradually
evaluating this rising problem (12), in India, ESG reporting began in 2009 when the Ministry of Corporate Affairs (MCA)
issued its Voluntary Guidelines on Corporate Social Responsibility. This marked the beginning of spreading the concept of
corporate responsibility. Since then, there have been many changes to the reports that have been made. These include
Business Responsibility Reporting (BRR), Corporate Social Responsibility (CSR), IR, the National Guidelines on Responsible
Business Conduct (NGRBC), and now the Business Responsibility and Sustainability Report (BRSR), which was made
official by a SEBI circular on May 10, 2021(5).

Since the early 1970s, people have been investigating a link between environmental, social, and governance (ESG) factors
and company financial performance (CFP) (26). Investigates the link between business performance and ESG practices in
Malaysian public-listed corporations (82). Most investigations have concentrated on the influence of ESG performance and
disclosure in wealthy nations like Europe and the United States. Researchers have not extensively studied the impact of
ESG on Indian financial markets (14). In contrast, the strategic value of ESG indicators has been extensively researched for
privately owned organizations. Public companies have not obtained as much attention (7).

Most Indian researchers typically explored the influence of ESG disclosures on a firm’s financial performance by focusing
on companies listed on the NSE and BSE indices. However, our approach diverges as we utilize the most recent datasets of
publicly listed Indian companies to offer a comprehensive examination and possibly uncover insights not present in the
NSE and BSE datasets.

We selected the Indian stock market as our focus due to the wide availability of ESG Scores for nearly all publicly listed
firms. The direct relationship of the variables is already established, but the indirect relationship for Indian listed companies
has not been established. As far as we know, the present study is the first to investigate, determining the influence of ESG
scores on the firm value. The profitability performance of Indian firms spanning 2019 to 2023 is included in the analysis. We
employed the EViews-12 software package to examine the panel data of 124 companies.

The article is structured as follows: Section 2 is the literature review; Section 3 discusses the theoretical background and
hypothesis development. Section 4 Data and methodology. Section 5 provides the results and discussion. Finally, section 6

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provides a conclusion, Limitations, and Future direction.

2. Literature review
2.1. ESG Performance and Financial Performance
2.1.1. Overall ESG Performance and Financial Performance
The most innovative ideas of corporate social responsibility originated in Asia. They involved Indian business leaders
inspired by subcontinental faiths, such as J.N. Tata and Shibusawa Eiichi in Japan, who redefined Confucianism as a
concept of corporate responsibility (62). ESG measures are gaining prominence globally, as with Sustainability-conscious
firms. Many financial markets across the world, including the USA, Germany, United Kingdom, Canada, Norway, Malaysia,
Turkey, South Africa, Brazil, Singapore, Sri Lanka, the Philippines, Poland, Thailand, India, and China, have standards and
regulations in place for firm ESG disclosure (25). As worldwide awareness of ESG concerns grows, improving corporate
ESG influence becomes a critical component of company investment strategy (77). Many studies have examined the
connection between disclosure, financial performance, and market value. Few studies have been conducted to determine
how ESG performance influences the cost of capital and credit ratings. Nevertheless, studies examining corporate
performance or individual pillars are few and much focused on certain sectors or elements so an adequate overview still
needs to be established (18). The influence of ESG policies and functions on the financial outcomes of corporations has
been an area of debate in contemporary academia and business studies (6, 10). Various empirical studies have examined
ESGP and FINP's relationship (8, 11, 21). Prior research has shown diverse perspectives and mixed results about the
correlation between ESG initiatives and business financial performance (9). Several studies have demonstrated a positive
association between the performance of ESG metrics and the financial outcomes of enterprises (13, 18), The influence of
governance performance on financial performance (FINP) is stronger compared to the influence of social and
environmental performance (17, 19, 20), a notably negative statistical correlation exists with both the ESG score and FP
(15), and the outcome suggests that companies can achieve better financial success by aggressively pursuing ESG
activities (16). The concept of Corporate Social Responsibility (CSR) has been significantly influenced by the Stakeholder
theory (22). Based on stakeholder theory and previous research, we expect a favorable relationship between ESGP and
Financial performance (17).

2.1.2. Environmental performance and financial performance

In the 1990s, increasing concern about the environment and development issues led to greater encouragement of an
educational strategy that not only includes rapid environmental enhancement as an actual aim but also addresses learning
for sustainability in the long term (84). The Environmental Disclosure Performance Score is specifically developed to
assess the interaction between businesses and society within the business environment context. EDS addresses the
organization's disclosure practices around CO2 emissions, energy consumption, total waste, energy efficiency policy, and
emissions reduction policy (19) the concept that there could be a relationship between corporate financial performance
(CFP) and corporate environmental performance (CEP) has created significant theoretical and empirical interest (30). The
correlation between environmental and financial success has been a well-discussed subject among researchers (27).
studied the impact of 268 Japanese manufacturing companies' environmental performance on their financial performance
between 2004 and 2008 (31). Examines the dynamics of the connection between publicly traded Australian firms' financial
and sustainability initiatives, and the results show a significant positive relationship between the two (32). Found that
environmental disclosures are not significantly associated with the company's value (28). The results suggest a positive
association between the environmental performance of banks in developing nations and their financial performance (29).
The relationship between CEP and FP may be explained by various theoretical approaches. The concept of legitimacy
theory is mostly used to demonstrate why a corporation engages with environmental initiatives alongside its economic
activities. Legitimation is the procedure by which a company validates its entitlement to exist and guarantees that its

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activities align with prevailing business norms. Thus, commercial entities emulate prominent organizations in
environmental activities to validate their conduct (75).
2.1.3. Corporate Social performance and financial performance
A firm not only prioritizes the interests of its shareholders but also those of the general public (37). The discussion of the
relationship between CSR and corporate performance is not new; there are a few studies on this issue (36). The great
majority of empirical studies that have been conducted to date on the correlation between FP and CSP are limited to
samples of businesses that have been seen to engage in CSP (34). The stakeholder theory proposes an approach to
studying the association between CSP and the FP of corporations (35). Found a positive relationship between CSP and CFP
(38, 39), lending credence to stakeholder theory (33).
2.1.4. Corporate governance and financial performance
Corporate Governance, in nature, refers to the degree to which firms are managed with transparency and integrity (41). CG
is defined as the regulations and processes that organizations employ to mitigate agency issues by distinguishing between
owners and managers. (42) Presently, the corporate governance reforms in India are at a stage. While the reforms are well-
intentioned, it is imperative to identify a comprehensive solution that addresses the unique challenges of the Indian context
(43). A corporation can enhance its value and performance by streamlining its leadership and control by implementing a set
of systems and mechanisms known as corporate governance. Therefore, a company's chances of achieving better
performance increase with its efficiency level (44). Much research and discussion were performed to evaluate whether
corporate governance components, such as board size, composition, audit committees, and the distinction between
ownership and control, have any bearing on the financial health of the companies. However, the results of these studies and
discussions have been inconsistent (45). An insignificant negative correlation exists between CG practices and financial
distress likelihood (40). The relationship between corporate governance mechanisms and financial performance can be
positive, negative, or have no effect (46). The empirical findings supported agency theory and resource dependency theory
and validated that the corporate governance variables impact corporate performance (76).
2.2. ESG Performance and Firm Value
2.2.1. Environmental Performance and Firm Value
Increasing environmental issues have sparked societal concern for the environment, particularly in developed countries,
while developing countries prioritize industrial development (49). The firm value serves as the foundation for attaining
short-term, medium-term, and long-term objectives. It enables the organization to compete in a manner that optimizes its
value (52). Businesses have a greater potential to enhance the usefulness of environmental performance by acting as a
mediator between the effects of sustainable practices and financial performance (47). Based on earlier empirical research,
businesses that practice Eco-efficiency are valued higher compared to those that don't (48). In the industrial companies
surveyed, Tobin's Q ratio, market value, and stock turnover rate are all statistically significantly impacted by environmental
disclosure (49). Examine the relationship between greenhouse gas emissions and corporate Eco-efficiency by utilizing data
obtained from the S&P 1200 list of multinational companies, The statistical analysis indicates a positive correlation
between the company's market performance and its emissions (50). A study of 3,237 Japanese businesses found that
investing in the environment has a big impact in the long term but not particularly in the short term (53). Stakeholder and
agency theories are tested to explain the association between firm social-environmental responsibility and financial
performance (51).
2.2.2. Social Performance and Firm Value
Social performance comprises the effective management of key stakeholders, including employees, customers, and society
(55). This concept demonstrates the need for businesses to take on greater social and environmental responsibilities. A
business has duties, obligations, and rights toward the general public and other citizens (54). A firm is responsible for

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safeguarding not just the interests of its investors, but also the general public (79). The previous work employed slack
resource theory, good management theory, singling theory, and agency theory (56). Investigated the link between CSP and
Firm Value. directly or indirectly through CFP and Firm Risk. However, the CSP does not significantly impact Firm Value by
Risk (54). CSP increases corporate valuation more in the service sector. Additionally, CSP strongly correlates with market
valuation in the subsequent year (57). A sample of 130 European-listed banks suggested a fundamental understanding of
the association between social reporting and value. Cross-country examination indicates that social reports have varying
effects on stock prices. In some countries, they have a positive impact, while others have a negative effect (58).

2.2.3. Governance Performance and Firm Value

In recent years, corporate governance has become a widely discussed topic in boardrooms, academic gatherings, and
policy circles worldwide. Previously, only a few researchers and shareholders were familiar with the term (60). A great deal
of investigation has been done to investigate the link between governance at the company's level and performance or value
(61). Good corporate governance has a substantial and positive impact on the value of a firm by influencing its financial
performance (69). Efficient corporate governance in financial organizations, especially in the banking industry, is crucial for
maintaining the economic system's stability and preventing financial crises (59). A study examined the influence of
corporate governance on the value of Indian companies listed in the BSE 200 index from 2009-10 to 2011-12. Research
indicates a significant connection between corporate governance and firm value in Indian enterprises. (101). Effective
corporate governance practices affect firm valuation. Having separate board members and investors owning the company
is a positive value creation aspect (63). The study used the two-stage least squares (2SLS) model estimation approach to
remove simultaneous equation bias. Corporate governance seems to positively impact accounting returns and market
indices (Tobin's Q) (64).
2.2.4. Overall ESG Performance and Firm Value
ESG factors measure a firm's non-financial performance. Some studies argue that ESG activities improve a firm's value and
performance by reducing costs and risks, whereas others perceive them as a waste of resources (67). Numerous
researchers have investigated the connection between corporate financial performance and ESG. Despite recent positive
outcomes, various articles have found negative results, which state that the firm's main goal is to maximize shareholder
profit (65). A unique dataset of almost 4000 enterprises from 2002–2011 from 58 countries. However, primary analysis
links ESG controversies to corporate value, with no direct effect on firm value when interacting with the corporate social
performance (CSP) score; the interaction is extremely and significantly positive (66). There is an inverted U-shaped
association between market value, ESG, and the Social Pillar Score (SPS), and a U-shaped relationship between market
value and the Environment Pillar Score (68).
2.2.5 Profitability, Performance and Enterprise Value
Profitability refers to a company's capacity to earn profits within a specific time frame. Companies must sustain the
earnings that have been acquired. Otherwise, the firm would encounter challenges in attracting external funding. Significant
earnings suggest positive firm prospects, which might subsequently stimulate a rise in market value (78). Corporate value
is a key topic for investors since it reflects the market's overall perception of the firm (72). Studies in financial management
indicate that Profitability aspects usually directly affect a business's market value. Causality demonstrates the aspects of
profitability and favorable conditions; as a result, it will positively impact investors' investment decisions (70). Profitability is
a key financial indicator for investors to analyze a company's annual profit growth. According to investors, a corporation
that experiences a growing level of profitability sends a favorable signal of the potential growth of their investment (73).
Previous research addressing the association between ESG and financial performance (FP) has often employed measures
like return on assets (ROA) to evaluate the financial outcomes (100). The study found that the value of a firm is significantly
influenced by the size of the company and the return on assets (ROA). The findings demonstrate that greater profitability
and larger firm size convey a favorable signal to investors, thus motivating them to purchase company stocks. Increased

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investor demand stimulates the rise of corporate value (71). The elements that contribute to profitability, as determined by
the study, have no impact on the firm's value (74).

3. Theoretical background and hypothesis development

Stakeholder theory states that the organization's objective must be determined by carefully considering and reconciling the
competing interests of different stakeholders inside the firm, including managers, workers, investors, suppliers, and vendors
(23). The theory emphasizes stakeholders' shared interests rather than inevitable trade-offs. While admitting the trade-offs,
it sees them as opportunities to explore value creation. By creatively redefining stakeholder interests, this approach strives
to increase satisfaction and value for all stakeholders actively involved (24). According to the previous studies, the
Stakeholder theory, whether used separately or in conjunction with other frameworks, provides a foundational lens for
understanding the benefits of ESG (Environmental, Social, and Governance) reporting in business planning. This theoretical
approach explains how ESG disclosures can meet stakeholders' expectations, safeguard their interests, and foster trust,
potentially improving corporate performance and profitability (80).

Absolute and Relative valuation are two major theories that explain the relationship between a company's financial
performance and its market value. Absolute valuation seeks to determine a company's genuine value by analyzing
extensive financial data, but it is hard and impractical. Relative value is easier because it relies on comparisons to similar
companies (86).

Based on the theoretical background, the following hypotheses are tested.

H1: According to the literature, the performance of the ESG positively impacts the firm profitability of publicly listed Indian
enterprises.

H2: The performance of the ESG positively impacts the firm Value of publicly listed Indian enterprises.

H3: The Profitability performance of Indian publicly listed enterprises increases their value.

H4: Profitability mediates the relationship between ESG performance and firm value.

4. Research design
4.1 Data
This study utilizes the annual data for different sectors of publicly listed Indian enterprises to examine the mediating effect
of ESGP on a firm’s profitability measures and its enterprise value. the financial performance data were obtained from
Money Control. As a metric for evaluating the ESG performance of firms, this approach utilizes the ESG scores (0-100) of all
the elements of the firms included in the sample from 2019 to 2023. ESG scores of the companies were retrieved from
Refinitive Eikon's database in May 2024. Table 1 shows the description and data source of the variables.

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 Table 1
A summary of the variables and their data sources.
Variable type Variable Description Data source

Explained EV Enterprise value: EV = Market Capitalization + Market Value of Debt – Money

variable Cash and Equivalents Control

Intervening ROA Return on assets (ROA) = net income/total assets Money

variables Control
ROE Return on equity (ROE) = net income/shareholders’ total equity

ROCE Return on capital employed: EBIT/capital employed

Explanatory ESG The total score of Environmental performance, social performance, and Refinitive
variables Governance performance of the firm Eikon

4.2 Variables
ROCE -Return on Capital Employed, a profitability ratio that measures how effectively a business converts its capital into
profit. Investors typically utilize it to determine whether a company is suitable for investment. It is also used for comparing
performance between businesses, as a company that earns higher returns per rupee of capital invested in a business
generates more value. ROCE is a strong indicator for assessing a firm's sustainability, as it indicates the efficiency of asset
performance concerning long-term financing (81).

ROA -Experts and financial analysts favor Return on Assets as a profitability metric. It demonstrates the firm's efficacy in
utilizing its finances to produce profit. A greater return on assets is advantageous and signifies the firm's efficacy in
handling its balance sheet (65)

ROE- The proportion of net profit to average shareholders' equity, or return on equity, measures how effectively a company
uses its capital. This indicator indicates the capacity to generate net revenue from equity capital. A greater index value
correlates with an increased return on investment (86).

ESG -Companies use the terms "environmental, social, and governance" (ESG) to denote their obligations. Stakeholders are
now concerned about ESG disclosure information in sustainability reports, as it might reveal the long-term potential of
investments (87). EP -The environmental element (E) assesses how companies implement measures to safeguard and
reduce effects on the environment. This component covers climate change, resources, pollution, and environmental
opportunities. SP -The social component assesses how companies engage with all of their staff and the societies they
serve. Some of the most important things to think about are working conditions, human rights, corporate diversity, fair pay
and benefits for workers, inclusion, product accountability, and the health and safety of the [Link] -Firm
governance (G) assesses management leadership and oversight of organizational power. This element evaluates board
operations, framework, regulations, salaries, lobbying, corruption, donations, visions, and tactics (85). Previous research
uses ESG ratings from different companies (86). Rating agencies only offer as much information as corporations submit,
which does not eliminate user ESG information asymmetry. Therefore, stakeholders, fund managers, investors, and
academics should utilize ESG ratings cautiously to avoid improper utilization of investment funds based on ideal ESG
conduct (85). This study chooses the ESGP disclosure score from Refinitiv Eikon as a benchmark of openness in
sustainability reporting for Indian-listed companies.

EV - This study chooses Enterprise Value (EV) as an explained variable. EV typically signifies an enterprise's capacity to
provide satisfactory profits to all its stakeholders, especially creditors, investors, managers, staff members, and the
government, under value-centric governance and legal frameworks (80). One of the primary concepts considered is the
firm's value, defined as investors' assessments of the company's amount of success as represented by the stock price (74).
A raised stock price signifies an increased corporate value, denoting enhanced prosperity for stockholders. The principal

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objective of any corporation is to increase its value. Following a company's initial public offering, its enterprise value is
manifested in the share price (83).
4.3 Models
To estimate the relationships, we employed the panel PMG-ARDL model. The panel ARDL model is a cointegration
technique that uses panel data to study the relationship between variables. It can estimate both short- and long-term
dynamics. All the variables are shown in log form because Log transformation helps to standardize data distributions,
which increases the reliability of statistical tests. It also reduces the effects of outliers by compressing the size of high
values, ensuring that extreme observations do not disproportionately affect the conclusions. To estimate the indirect
relationships, first, the direct effect between ESG and EV should be confirmed; thereafter, the relationship among ESG and
ROA, ROE and ROCE should be analyzed, and then the impact of these variables on EV should be estimated. Lastly, to
assess the significance of mediating effects, we employed the Sobel (1982) test (90). The following basic model was
framed for the variables.

LEVit = β0་β1LESGPit་β2LROAit + β3LROEit་β4LROCEit་εit (1)

Various panel unit root tests can be employed in panel studies, which are divided into two categories: first-generation panel
unit root tests and second-generation panel unit root tests. Before selecting an option, it is essential to identify the
variable's cross-sectional interdependence (88). Cross-sectional dependency tests in ARDL models are critical for
determining correlation among cross-sections over time. Ignoring cross-sectional dependence might result in inaccurate
estimations. Four CDS tests are used to ensure consistent results. These include the Breusch-Pagan Lagrange Multiplier
(LM), the Pesaran Scaled Lagrange Multiplier (LM), Bias-corrected (LM), and the Pesaran Cross-sectional Dependence (CD).
To estimate the CSD test, we used the following equation suggested by Pesaran (2004) (89).

2T N −1 N
CD = √ (∑ ∑ ρ̂ ij)
N (N −1) i=1 j=i+1

T represents time (period), N indicates panel cross-section, and ρ represents pair-wise correlation residual.

to investigate the effects of both the long and short run on the mediating effect, and the role of ROA, ROE, and ROCE on the
impact of ESG on EV, we used the Pooled Mean Group (PMG) estimation method (91), proposed by Pesaran et al. (1999)
(92) for the panel ARDL model. the study employed the following equation for long run panel ARDL.

p q
yit = α it + ∑ β ijyit − i + ∑ γ ijxit − j + ϵ ij
j= 1 j= 0

The following is the error correction term model equation.

p q
Δ yit = α it +ψ ( yit−1- β i xit− 1) + ∑
j= 1
γ ijΔ yit − j + ∑
j= 0
j
δ ijΔ xit− +ϵ ij (4)

Where x and y represent the independent and dependent variables, “ψ “is the adjustment parameter’s error correction term.
the long-run impact of the explanatory variable on the response variable is denoted by “γij” and the short-run impact of the
dependent variable on the independent variable is “ δ ij”.

To estimate the mediating relationship, we used the Sobel test (93). The mediating effect is confirmed when the Sobel
statistic is significant (89). To find the relationship, we used the following equation

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 a∗ b
Z − V alue =
2 2 2
√b ∗ S +a2 ∗ S
a b

Here, ‘a’ represents the effect of the independent variable on the mediating variable ‘b’ represents the impact of the
mediating variable on the dependent variable. Sa is the standard error of a, Sb is the standard error of b.

5. Results and Discussion

Table 2 shows the data of the variables under consideration concerning statistical measures like central tendency,
dispersion, and normality. Compared to other performances, the mean of the ESG performance is high. However, the ROA
has the lowest mean. LEV has the highest maximum value. When we analyze the minimum values, both LROA and LROCE
have the lowest value. And the correlation matrix shows the correlation coefficient among ESGP, profitability measures, and
Enterprise value. It represents that all profitability variables are highly correlated with each other. And they also positively
correlated with LESGP. However, LEV is negatively correlated with LROA and LROCE, but positively correlated with LROE.

Table 3 confirms the cross-sectional dependency of all variables using the Pesaran Scaled Lagrange Multiplier (LM),
Breusch-Pagan Lagrange Multiplier (LM), Pesaran Cross-sectional Dependence (CD) tests, and Bias-corrected (LM). The
table displays the results of cross-sectional dependence tests of five variables: LESGP, LROA, LROE, LROCE, and LEV. For all
the variables, the null hypothesis test shows that there is no cross-sectional dependency. So, we rejected the null
hypothesis, and we used 1st stage of the panel unit root test, including the Augmented Dickey-Fuller and PP unit root tests,
to assess the stationarity of the variables used in the study.

The findings of the Augmented Dickey-Fuller, PP (Phillips-Perron) unit root test at the level and 1st difference for five
variables are shown in Table 4. The test runs under the intercept conditions among them. Some variables are I (0)
(stationary at level), whereas others are I (1) (stationary at the first difference). Across all variables, the test results are
consistently negative and significant. So, the panel ARDL model is the best suited to do further analysis.

Table 5 shows the long-run impact of explanatory variables on response variables. The table displays long-term panel ARDL
(Autoregressive Distributed Lag) results that demonstrate the links between ESG, financial performance metrics (ROA, ROE,
ROCE), and enterprise value (EV). The long-run ARDL results show that ESG performance improves financial performance
metrics (ROA, ROE, and ROCE), which in turn boosts enterprise value. The statistical significance of all associations
highlights the critical role ESG plays in encouraging long-term financial success and value creation for businesses. These
results align with certain aspects of previous studies while differing in others.

Based on the results, the study found that improving ESG performance substantially enhances enterprise value (94). Large
firms with high profitability are more likely to implement ESG practices and see a favorable impact on their value. It implies
that large, profitable businesses are more likely to use their excess cash for ESG initiatives to improve communication with
both internal and external stakeholders, build a positive company image, increase their legitimacy and competitiveness, and
achieve high enterprise value (95). The effect of Profitability has a mixed effect on EV; return on equity (ROE) has a slight
positive relationship, and return on assets (ROA) has a slight negative association (96). The study shows that return on
capital employed (ROCE) negatively affects the banking sector's enterprise value (EV) (97). The findings indicate that
environmental disclosure has a positive impact on ROA and TQ (99), especially in the Indian context, and that strong ESG
performance improves financial success in India, which can be measured by accounting-based metrics such as ROCE and
EV (98). The findings indicate that listed firms' market value can be increased by improving their ESG performance, and
there is a clear mediating influence between the two. However, operational capability plays a significant mediating role in
the relationship between ESG performance and the market value of the company (86).

Table 6 displays the short-term outcomes of a Panel ARDL. In the short run, ESG increases company value (EV), but has
varied effects on profitability (ROA, ROE, and ROCE). The ESG-ROE coefficients are negative but statistically significant,
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showing that ESG activities may not result in rapid profitability benefits. In terms of performance indicators influencing EV,
ESGP to ROE has a short-run connection (coefficient is -0.76, p = 0.050).

Table 2
Descriptive statistics and correlation analysis
LESGP LROA LROCE LROE LEV

Mean 1.6968 0.6908 1.0239 1.0043 0.8508

Median 1.710 0.710 1.107 1.1024 0.7644

Maximum 1.934 2.133 1.965 1.923 2.710

Minimum 1.010 0.004 0.004 0.0086 0.0089

[Link] 0.1392 0.419 0.4335 0.4005 0.555

Skewness -0.9467 0.072 -0.6324 -0.8754 0.8066

Kurtosis 4.6696 1.9872 2.5929 3.1702 3.2067

Jarq-Bera 164.632 27.041 45.613 79.945 68.337

Probability 0.000 0.000 0.000 0.000 0.000

Sum 1052.027 428.339 634.874 622.69 527.503

Sum [Link] 12.003 108.915 116.340 99.335 190.716

LESGP 1.000

LROA 0.1377 1.000

LROCE 0.1433 0.7707*** 1.000

LROE 0.0715 0.7466*** 0.6768*** 1.000

LEV 0.1611 -0.0981 -0.1317** 0.1074 1.000

Observations 620 620 620 620 620

** and *** indicate the significance of 5% and 1%

In Table 7, the Sobel test results show that ROA, ROE, and ROCE mediate the link between ESG and EV. The mediation
analysis shows that ROE does not significantly mediate the [Link] (Z value = -2.000, p = 0.045) and ROCE (Z value
= -2.43, p = 0.01) have a statistically significant mediation effect, implying that these are critical in connecting ESG practices
to enterprise value. This implies that improvements in ROA and ROCE increase the impact of ESG on EV.

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 Table 3
CSD (Cross-Sectional dependency) test
Variable Test

Pesaran scaled LM Bias-corrected scaled LM Pesaran CD Breusch -pagan LM

LESGP Coefficient 44.069 28.569 32.645 13068.47

P value 0.0000 0.0000 0.0000 0.0000

LROA Coefficient 20.862 5.3625 3.0104 10202.50

P value 0.0000 0.0000 0.0026 0.0000

LROE Coefficient 24.803 9.303 4.432 10689.19

P value 0.0000 0.0000 0.0000 0.0000

LROCE Coefficient 29.857 14.357 6.850 11313.27

P value 0.0000 0.0000 0.0000 0.0000

LEV Coefficient 78.302 62.802 96.247 17296.24

P value 0.0000 0.0000 0.0000 0.0000

Table 4
Augmented Dickey-Fuller & Phillips-Perron unit root test
ADF Unit root test PP Unit root test

Variable At level At 1st difference At level At 1st difference

Coefficient Probability Coefficient Probability Coefficient Probability Coefficient Probability

LESGP -1.15763 0.1235 -7.4233 0.0000 -1.54526 0.0611 -7.8688 0.0000

LROA -2.98937 0.0014 -6.8738 0.0000 -2.92590 0.0017 -7.8185 0.0000

LROE -2.56679 0.0051 -6.0698 0.0000 -2.91851 0.0018 -6.3556 0.0000

LROCE -1.32973 0.0918 -3.4183 0.0003 -1.47150 0.0706 -3.6726 0.0001

LEV 0.71862 0.7638 -10.7859 0.0000 1.01745 0.8455 -12.1559 0.0000

Table 5
Panel ARDL long-run estimation results
Relation of the variables Coefficient Probability

LESGP -LEV 0.472 0.0000***

LESGP -LROA 0.435 0.0000***

LESGP-LROE 0.593 0.0000***

LESGP-LROCE 0.620 0.0000***

LROA -LEV 1.052 0.0000***

LROE -LEV 0.726 0.0000***

LROCE -LEV 0.632 0.0000***

** and ***indicate the significance of 5% and 1%
Page 11/19
 Table 6
Panel ARDL Short-run estimation results
Relation of the variables ECM D(LESGP-1)

LESGP - LEV Coefficient 0.219 -0.0165 -0.1341

Probability 0.340 0.199 0.1126

LESGP -LROA Coefficient -0.230 0.0218

Probability 0.531 0.378

LESGP-LROE Coefficient -0.761 0.0871

Probability 0.0509 0.0016

LESGP-LROCE Coefficient -0.4979 0.0380

Probability 0.1453 0.0462

LROA -LEV Coefficient 0.10637 -0.0188

Probability 0.2525 0.1419

LROE -LEV Coefficient -0.0661 -0.02298

Probability 0.2639 0.0754

LROCE -LEV Coefficient -0.01177 -0.0193

Probability 0.9139 0.1342

Table 7
Sobel test for mediation analysis
Variables Intervening Variable Sobel Test Probability

LESG -LROA -LEV LROA -2.000 0.045**

LESG - LROE -LEV LROE 1.486 0.137

LESG - LROCE -LEV LROCE -2.438 0.015***

** and ***indicate the significance of 5% and 1%

6. Conclusion and Future Research Directions

Although there has been extensive research on this topic. Unfortunately, not much research has been conducted on this
topic in growing economies such as India. To the best of our knowledge, this paper is one of the first to examine the
connection between profitability metrics, such as ROA, ROE, and ROCE, and how ESG performance affects the enterprise
value of publicly owned Indian enterprises, distinguishing between short—and long-term impacts. In this study, we used
panel data of a total of 124 Indian listed companies. To run the model, we performed a cross-sectional dependency test
and got significant results at this stage. To check the stationarity, we performed the Augmented Dickey-Fuller and Phillips-
Perron unit root tests. the test runs under the intercept conditions of the variables. among them, some variables are I (0)
(stationary at level), whereas others are I (1) (stationary at the first difference), therefore, we performed the PMG-ARDL
model to estimate long-run and short-run relationships. The result offered evidence of significant relationships among all
the connections in the long run. In the short run, ESG increases company value (EV) but has varied effects on profitability
(ROA, ROE, and ROCE). The ESG-ROA and ROE coefficients are negative but statistically insignificant, showing that ESG
activities may not result in rapid profitability benefits in the short run. In terms of performance indicators influencing EV,
ROE to EV has a strong short-run positive connection, implying that a higher return on equity leads to increased firm value.
Page 12/19
based on the findings, we found the mediation effect between the variables. According to the Sobel test, the mediation
analysis shows that ROE does not significantly mediate the connection. ROA and ROCE have statistically significant
mediation effects, implying that these are critical in connecting ESG practices to enterprise value. This implies that
improvements in ROA and ROCE increase the impact of ESG on EV. This study has significant implications for the Indian
listed firms. It develops awareness among stakeholders, decision-makers, legislators, and researchers on the role of ESG
disclosure on business performance and encourages individuals to invest more in social responsibility initiatives and those
who make decisions to support them. This can create benefits at the business level and enhance awareness among
communities of this topic.

This study has a few shortcomings, first, the data is restricted to the 2019-2023 timeframe, which might not accurately
represent long-term patterns. Second, the analysis only considers publicly traded Indian companies, which may limit the
findings overall to other markets. Third, utilizing solely profitability metrics like ROA, ROE, and ROCE, which might not fully
represent the range of financial performance, the study looks at mediating effects. Finally, the study examines overall ESG
performance without taking into account the sub-components of ESG for the Environmental, Social, and Governance pillars.
future studies could analyze each ESG component's performance and may provide more detailed insights into their
respective financial outcomes.

Declarations
Disclosure of interest: No potential conflict of interest was reported by the authors

Funding: No funding was received

Ethical approval : NA

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