This study examines the interplay between financial distress (FD) and Environmental, Social, and Governance (ESG) scores on firm valuation in India during the pre- and post-Paris Agreement periods. It explores the impact of regulatory changes and employs advanced econometric models to analyze ESG integration under financial constraints.
The study uses data from 512 companies listed on the NSE of India from 2012 to 2023. It employs Generalized Linear Models, Mixed Linear Models, and Generalized Additive Models to capture the relationships and interaction effects between FD and ESG scores, with Decision Tree Analysis used as a robustness check.
The analysis shows that strong ESG practices significantly enhance firm valuation, particularly during periods of financial distress, by fostering investor confidence. However, financial distress may constrain a firm’s ability to invest in ESG initiatives. Regulations introduced under the Paris Agreement further amplify the positive impact of ESG scores, promoting sustainable business practices. The study also identifies non-linear relationships between firm valuation and determinants such as size and growth—larger firms are better positioned to implement comprehensive ESG strategies, while smaller firms can leverage their agility to adopt innovative sustainability practices.
The study focuses on financial distress and ESG scores. Future research could incorporate additional aspects of environmental performance, such as carbon emissions and corporate social responsibility (CSR), and examine these relationships in other emerging economies.
Firms should prioritize ESG investments even during periods of financial distress to mitigate adverse effects and strengthen reputation and investor confidence. Compliance with frameworks such as the Paris Agreement can enhance transparency and improve access to capital.
This study provides novel insights into the combined effects of financial distress and ESG scores on firm valuation, particularly within the context of regulatory changes introduced by the Paris Agreement. It makes a significant contribution to the evolving discourse on sustainable finance and corporate governance.
