ESG and Financial Performance Nexus: A Study of Selected Indian Public and Private Banks

Abstract

This study investigates the effect of Environmental, Social and Governance scores on the financial performance of Indian banks, focusing on the moderating effect of ownership structure. The study examines the link between ESG scores and financial performance using a hierarchical multiple regression analysis of panel data from 224 bank-year observations from selected public and private sector banks in India. Financial performance measures used were Return on Equity and Tobin's Q, while bank-specific control variables are size, leverage, loan to deposit ratio, capital adequacy ratio, non- performing assets and cost to income ratio. The results showed that ESG score had a positive and significant impact on ROE, suggesting that better sustainability practices correlate with higher shareholder returns. Ownership structure was a key moderator of this relationship with public sector banks showing a more positive correlation between ESG and ROE than private sector banks. No statistically significant moderating effect of ownership structure was observed for market-based valuation measures. The study contributes to ESG and banking literature in the Indian context by Providing empirical evidence of differential effectiveness of ESG in different ownership structures. The findings have implications for regulators, investors and bank management to enhance the strategic decision-making and sustainable financial performance based on ESG.