Corporate Sustainability as a Mitigator of Financial Distress Risk: Panel and Quantile Evidence from an Emerging Economy

Abstract

Firms make substantial investments in environmental, social, and governance (ESG) initiatives, but there is limited understanding of whether such investments actually safeguard them from financial distress. In emerging economies, this is particularly relevant because unforeseen events such as crisis, regulatory changes, and industry dynamics can drive companies towards failure. Addressing these issues, this study analyses a panel dataset of 566 listed Indian companies from 2012 to 2024 and finds that sustainability performance consistently mitigates financial distress risk across the full distribution of firms, as validated through a method-of-moments quantile regression analysis. Context-based analyses further reveal that the favorable ESG effect remains stable during the COVID-19 crisis period and varies by industry affiliation. Simulation-based mediation analysis identifies firm leverage as a key transmission channel of the ESG-distress link. Lending support to risk management, trade-off, and strategic management theories, this work underscores the ‘insurance-like’ role of sustainability and deepens the conceptual understanding of how ESG can act as a strategic hedge against financial risks.