ESG Performance, Corporate Governance, and Firm Value: The Mediating Role of Financial Sustainability new Emerging Markets in India

Abstract

Environmental, social, and governance (ESG) performance and corporate governance have become increasingly important in corporate valuation, particularly in emerging markets where institutional conditions influence sustainability practices and financial outcomes. However, the mechanisms through which these factors are associated with firm value require further empirical investigation. This study aims to examine the relationships among ESG performance, corporate governance, financial sustainability, and firm value in Indian listed companies, with particular attention to the mediating role of financial sustainability. The research employed a quantitative approach based on 720 firm-year observations of non-financial listed firms in India. Descriptive statistics, correlation analysis, multicollinearity diagnostics, fixed-effects panel regression, and mediation analysis with bootstrapped confidence intervals were applied. Firm value was measured using Tobin's Q, while financial sustainability was assessed through the Sustainable Growth Rate. The results revealed positive associations between ESG performance, corporate governance, and firm value. ESG performance and corporate governance were also positively associated with financial sustainability, which demonstrated a significant relationship with firm value (β = 1.842, p < 0.01). The inclusion of financial sustainability increased the explanatory power of the firm-value model from 41.2% to 48.6%. Mediation analysis identified significant indirect effects of ESG performance (β = 0.0052) and corporate governance (β = 0.1551) on firm value through financial sustainability, with confidence intervals excluding zero. These findings indicate that financial sustainability partially mediates the examined relationships and represents an important financial mechanism associated with corporate valuation. The study contributes to emerging-market research by integrating ESG performance, corporate governance, and financial sustainability within a unified analytical framework. Further research should examine individual ESG dimensions, sectoral differences, alternative measures of financial sustainability, and potential endogeneity to establish the robustness of these relationships across different institutional environments.