Unveiling the Nexus Between ESG and Financial Performance: The Mediating Role of Financial Constraints—Evidence from India

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Abstract
In recent years, the prominence of environmental, social, and governance (ESG) investing has expanded significantly due to growing awareness of sustainability issues, such as climate change and social justice concerns, as well as an increasing understanding of the need for sustainable business approaches. This increasing focus on ESG has led to a growing demand for ESG-related disclosure in the financial market. Therefore, this study investigates the mediating role of financial constraints in the relationship between ESG disclosure and financial performance. The study aims to determine whether firms with strong ESG disclosure experience reduced financial constraints, leading to improved financial outcomes. Analyzing 690 Indian-listed firms from 2011 to 2022, the research provides a comprehensive assessment of sustainability practices in an emerging market. Findings suggest that a company’s ESG disclosure has a positive impact on the financial outcome performance, with financial constraints acting as a partial mediator. Organizations that implement effective ESG disclosure encounter reduced financial constraints, ultimately enhancing their financial stability. Through the application of a mediation effect model, the study clarifies the indirect influence of financial constraints on the relationship between ESG and financial performance. These results highlight the importance of disclosing ESG initiatives in enhancing operational efficiency, mitigating financial risks, and fostering stakeholder trust. The insights contribute to the ongoing discussion on the integrated reporting of ESG and its financial implications. JEL Codes: G32, G34, M14, Q56

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