Exploring the Moderating Role of Country Governance in the Relationship Between Sustainable Performance and Firm Performance: Empirical Evidence From an Emerging Market

Abstract

Sustainable development is increasingly reshaping corporate strategies, particularly in emerging markets such as India, where environmental, social, and governance (ESG) integration has become pivotal for long‐term value creation. This study examines the impact of ESG performance on firm outcomes for Nifty 500 firms over 2014–2024, considering both aggregated and disaggregated ESG dimensions, while assessing the influence of country‐level governance mechanisms. Using panel regression analysis, the findings reveal that robust ESG practices significantly enhance financial, operational, and market performance, underscoring their strategic relevance. At the disaggregated level, social (SOC) and governance (GOV) performance consistently improve profitability, efficiency, and market valuation, whereas environmental (ENV) initiatives exhibit short‐term negative effects, likely due to compliance and investment costs. Further, country governance indicators, including voice and accountability (VAA), political stability and absence of violence (PSV), government effectiveness (GVE), regulatory quality (REQ), rule of law (ROL), and control of corruption (COC), differentially shape the ESG–performance link. While VAA, PSV, REQ, and GVE enhance ESG's impact, ROL and COC constrain immediate gains, highlighting the role of governance quality in aligning ESG initiatives with firm‐level outcomes. The study provides critical insights for regulators, policymakers, investors, and corporate managers, emphasizing governance as a key enabler of sustainable growth in an emerging market.