CHAPTER 1

INTRODUCTION

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1.1 Introduction

Scholars have been studying the relationship between economic expansion and its influence
on the environment for decades. One of the key hypotheses in this subject is the
Environmental Kuznets Curve (EKC). It claims that initially, economic expansion has a
negative ecological effect that expands with the economy until a tipping point, at which time
environmental harm stabilizes and begins to diminish while economic growth continues
(Kuznets, 1955). According to Asian Development Bank projections, the Indian economy
would be the fastest growing in Asia, with a 7.3 percent increase in GDP in the current fiscal
year and a 7.6 percent increase in FY20 (Economic Times, 2018). It may be claimed that
India still has a long way to go before the environmental harm caused by industrial activity
stabilizes. Over the last decade, the globe has witnessed a lack of governance during the
global financial crisis, a rising threat from global warming, and social activity. These
incidents have resulted in a common understanding of the necessity of environmental
stability, socioeconomic development, adherence to ethical norms, holistic growth, and
responsible investment.

Several important policy developments have happened in the regulatory landscape of India
from the last decades. One of the the Enterprises Act, which was updated in 2013( section
135 ) of the Act now mandates the qualifying companies to spend 2% of their net yearly
earnings on corporate social responsibility (CSR) initiatives (Companies Act, 2013). From
the perspective of Indian investors, the stress on sustainable and responsible investment
techniques has progressively increased in these years. Environmental, Social, and
Governance (ESG) practices oriented portfolio selection strategies have Drastically increase
to acquired appeal between investors, working mostly due to the participation of entities
such as the United Nations Environment Program Finance Initiative.

The core idea of ESG-based investment is to discover and quantify the intangible value
offered by socially responsible, environmentally conscious companies with strong
governance mechanisms in place. These companies are seen to have stronger risk
management strategies on ESG factors, which provide value for investors through long-term
sustainable business models. These ESG indicators, which indicate an organization's non-
financial performance, are many and ever-changing. They are as follows:

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1.1.1 Pillars of ESG

As previously said, ESG is built on three pillars: environmental, social, and governance. Each
of these pillars has a number of elements that would be considered "parameters" in an ESG
study.

 Environmental: Climate change, greenhouse gas emissions, resource depletion

(including water, waste, and pollution), and deforestation are all examples of
environmental issues.
The "environmental" pillar focuses on building a sustainable environment, with
characteristics such as a company's influence on the climate, environmental liability,
manufacturing eco-friendly goods, and so on being examined and monitored;
 Social: Working circumstances such as slavery and child labour, health and safety,
conflict, , employee relations, indigenous and local communities and diversity.
The "social" part focuses on adding value to society by emphasizing human rights
concerns, workplace health and safety, labour training and management, community
involvement, and customer relationships, among other things.

 Governance includes executive compensation, political lobbying and donations,

board diversity, bribery and corruption, and tax strategy.

The "governance" aspect is concerned with a company's corporate governance and

includes two key components: corporate structures and corporate behaviour.

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 Figure: 1.1 Pillars of ESG

The ESG Index was initiated in India with the collaboration between CRISIL and the NSE
India. The objective of this ESG index is to specify exposure to assets of companies that
attain sustainability-investment criteria all over the world. For the developed economies, on
ESG there is a large amount of literature available. But in developing Countries the current
condition of ESG practices and their influence on Businesses has not been well explored.
The purpose of this study is to investigate the impact of ESG practices on the financial
performance of companies in Indian a developing country.

The term environmental, social, and governance ( ESG) gained attention when it was first
established by the United Nation’s Principles of Responsible Financial (UNPRI), and Now
days it has become quite popular among investment fraternity. This ESG is interchangeably
used with the SRI, sustainable investing and Responsible investment (Eccles & Viviers,
2011). A tremendous growth may be witnessed in ESG integration become a sustainable
approach internationally. ESG integration has explored by 69 percent over the previous 2
years, to $17.5 trillion in assets as per a research issued by Global Sustainable Investment
Review (GSIR) in 2018,. This rise clearly illustrates that asset managers and investors are
integrating the material ESG practices into their decision making (Ho & Wong 2003; Jemel-
Fornetty et al. 2011; Bourghelle et al. 2009; Friede et al. 2015). Stakeholders are also
interested in the openness of material ESG information of firms together with financial
information (Siew et al. 2013a) (Siew et al. 2016). Consequently, companies integrate ESG

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practices considerations in their business operations to attain investors’and asset managers’
expectations throughout the world wide (Lokuwaduge and Heenetigala 2017; Eccles and
Serafeim 2011). Furthermore, ESG has vastly attaining the attention of academicians and
researchers in recent years. To study the financial and non-financial impact of environmental,
social, and corporate governance (ESG) by researchers’ careful efforts have been undertaken
(Balatbat et al. 2012; Farooq et al. 2015; Dangwal and Sharma 2014; Aboud and Diab 2018;
Brooks and Oikonomou 2018). There has been a substantial study on the environment,
corporate social responsibility, and corporate governance separately internationally, but less
effort has been made to analyze the ESG practices of the Indian business sector despite their
high global competitiveness (Dangwal and Sharma 2014; Brooks and Oikonomou 2018;
Aboud and Diab 2018). Although the Business sector has grown significantly over last years,
research suggested that environmental and social performance remains poor over few years.
The Indian government's efforts to promote sustainable development, including its emphasis
on ESG practices among listed companies in India, are also positive. The NVG-SEE
(National Voluntary Guidelines on Social, Environmental and Economic Responsibility of
Business) were furnished in July 2011 by the Ministry of Corporate Affairs and feature nine
key concepts regarding ESG. As a result, the study's significance rests in attain a better
understanding of the motives for environmental and corporate governance, as well as social
performance.

The relationship between information Indian firms reveals on their environmental, social,
and corporate governance practices (ESG) and financial performance. The ESG performance
of the sample companies was analyzed using content analysis from their annual and
sustainability reports. The ESG practices index is created for this purpose with the assistant
of the GRI framework for companies. Financial and market performance has a positive and
significant relationship with the level of ESG practices by corporates, whereas FIIs’ stake
and leverage showed a significant and negative relationship with the level of ESG disclosure
after statistically controlling for the effects of a the industry type of the companies and
company's size, results based on the formulated model indicated that financial and market
performance has a positive and significant relation with the level of ESG disclosure, whereas
FIIs stake and leverage have a negative and significant impact between them.

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In recent years, corporate social responsibility (CSR) has gained a lot of traction in academics
and company management (Madorran and Garcia 2016; Barrena et al. 2016). Consumers,
suppliers, employees, investors, non-governmental organizations, and public authorities have
all demanded that organizations invest in the development and implementation of CSR
practices (Javalgi et al. 2009), while organizations have been under increasing pressure to
maximize productivity and profitability of the business (Javalgi et al. 2009). (Kolk and van
Tulder 2010). As a result, businesses are concerned not just with economic difficulties, but
also with the social and environmental consequences of their operations in market (Maas and
Reniers 2014). A company may succeed by following sound corporate governance
procedures and maintaining healthy links with the environment and the society (Foote et al.
2010).

The environmental, social, and governance (ESG) practices has find as a backbone of CSR
(corporate social responsibility) for the formulation of long-term policies and strategies that
affect financial performance of multinational corporations' (Eccles and Serafeim, 2013).
Indeed, the relationship between ESG performance and FP has been extensively researched
(McWilliams and Siegel 2000; Brammer et al. 2006; Van Beurden and Gössling 2008; Ortas
et al. 2015; Lee et al. 2016; Lo and Sheu 2007; Nollet et al. 2016; Surroca et al. 2010;
Waddock and Graves 1997; Friede et al. 2015), with mixed While some studies have found
that investing in ESG activities improves FP (Lo and Sheu 2007; Eccles et al. 2014; Cahan
et al. 2015; Fatemi et al. 2015; Filbeck et al. 2009; Wang and Sarkis 2017), others have found
negative impact of ESG practices (Fatemi et al. 2015; Lee et al. 2009; Cahan et al. 2015;
Eccles et al. 2014; Rodriguez-Fernandez 2016; Brammer et al. 2006; Branco and Rodrigues
2008).

The ESG factor, which includes environmental, social, and governance considerations,
shows a company's non-financial performance. The United Nations Principles for
Responsible Investment encourage investors to consider environmental, social, and
governance (ESG) problems when evaluating a company's performance. Furthermore,
investors, creditors, the government, and other environmental authorities are increasingly
concerned about firms' contributions to sustainable development.

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The epidemic and its global consequences are having a significant impact on how businesses
function. According to ESG, today's investors are more concerned about a company's
environmental, social, and governance practices, and they want to strike a balance between
financial return and shared and inclusive ideals.

ESG (environmental, social, and governance) is a major value criterion for every company.
It can tell you everything that balance sheets couldn't. As global catastrophes such as climate
change materialize as natural disasters and other socio-ecological effects, profit-making
ventures' asset interests are threatened. Instead of focusing just on economies, revenues, and
firms must be judged on their environmental, social, and governance standards. In addition,
the concept of success being explained solely in terms of financial gain is changing
internationally. The global investment community is, of course, the trigger point.

In terms of statistics, ESG-acquiescent corporations outperformed the typical S&P 500 index
member. ESG measurements, in addition to standard financial ratios, are considerably more
reliable indications of an organization's future profitability. The epidemic has highlighted the
need of firms' socio-environmental stewardship in guaranteeing their fiscal viability and
purpose fulfillment.

1.1.2 Trends in sustainable investing globally

Investors are increasingly concerned about a company's environmental, social, and

governance (ESG) practices, and they want to hit a balance between financial return and
shared and inclusive ideals for their business. In fact, analysts have predicted that 2021 would
be a banner year for Sustainability Funds. Morningstar reported a $185.3 billion inflow into
sustainability funds in the first quarter of 2021, up 17 percent from Q4 2020, and a return of
8.76 percent in the second quarter, outperforming both the US Market Index and the US
Large-Mid Cap Index.

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Specific trends like:

 As investors seek greater socio-environmental-governance accountability for their

money, we will see an increase in ESG ratings of corporations as a means of
channeling investments toward assets with significant ESG value.
 As part of their long-term investment plans, investors are required to abandon linear
risk assessment models that do not account for non-financial effects in favor of more
forward-looking periodic modeling of the possible implications of future physical
shocks to the financial system.

1.2 ESG and Its Significance in Today’s World

The ESG analysis is used as a measure of responsible investing, and it goes beyond the usual
way of evaluating an investment or potential investment solely on the basis of financial
reasons. In essence, ESG recognizes the financial importance of many non-financial factors
that have an influence on the company in a variety of ways. With the goal of achieving
sustainable development in all we do, efforts have been made to include ESG problems in
the overall review of company performance.

The advent of ESG may be traced back to the early 2000s. A report titled "Who Cares Wins:
Connecting Financial Markets to a Changing World" highlighted emerging ESG issues and
made several recommendations, including (i) financial institutions should commit to the
more systematic integration of environmental, social, and governance factors in research and
investment processes, (ii) companies should take a leadership role by implementing
environmental, social, and corporate governance principles and policies, and (iii) companies
should provide informed disclosure. (iii) To reward well-managed corporations, investors
should openly seek and reward research that incorporates environmental, social, and
governance issues. Furthermore, the research advised financial analysts to evaluate ESG
concerns as a possible source of competitive advantage in addition to focusing on ESG
hazards and risk management. The following factors were also recognized in the research as
ways that excellent ESG management may help to shareholder value development.

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Companies must be socially responsible and match their wealth and value-creation
operations with the interests of a wider set of stakeholders, such as employees, the
environment, and society at large, according to ESG criteria. This means that maximizing
shareholder profit does not allow for the externalization of higher environmental and social
costs of running the business.

Though there are still powerful opponents to the trend toward ESG-focused corporate
governance, it appears that the ESG mandate is gaining traction internationally. Indian firms
like Tech Mahindra, Infosys, and Wipro are included in the Dow Jones Sustainability Index
(DJSI), which evaluates corporations' environmental, social, and governance (ESG)
performance internationally. Companies that have been a part of the DJSI and implement
good ESG practices have done well on the Indian stock exchanges in the past. This may be
due to the desire of institutional and ordinary investors to invest in firms that are seen to be
more socially responsible.

Blue-chip companies like Tata Consultancy Services (TCS) and Reliance Industries6 have
lately declared plans to reduce greenhouse gas emissions to zero. Investors, too, appear to be
interested in new ways to fund environmental and social programs. Green bonds were issued
by the Ghaziabad Municipal Corporation (GMC) to generate INR 150 crores, and they are
now listed on the Bombay Stock Exchange. The funding will be used to build a tertiary
treatment sewage facility for GMC. JSW Hydro Energy Limited has generated USD 707
million from investors across the world through the issuing of green bonds denominated in
US dollars that are now traded on the Singapore Stock Exchange.

1.3 Have the Laws Kept up with the Paradigm Shift

Stakeholder-centered corporate governance has long been a distinguishing feature of Indian

corporate governance standards. According to the Companies Act of 2013, a company's
director must act in good faith to advance the business's objectives for the benefit of all of its
members, as well as in the best interests of the firm, its workers, shareholders, the
community, and the environment9. The Supreme Court's recent judgment in the Tata-Mistry

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issue highlights the judicial perspective of firms with charitable goals and the good spill-over
benefits for a bigger stakeholder group outside of the shareholder group.

1.4 Disclosure Requirements

 Companies must not only explain the ESG risks they face, but also how they plan to
mitigate those risks. The financial ramifications of the situation must also be reported.

 The company's sustainability aims and how it has fared in this regard.
 Aspects of the environment such as greenhouse gas (GHG) emissions, waste
management techniques, waste generation volume, biodiversity, and so on.

 Gender diversity, social diversity (which includes measurements for differently abled
workers and employees), median pay, turnover rates, occupational health and safety,
welfare benefits, and other social disclosures relating to the company's workforce

 Social impact evaluations, corporate social responsibility, rehabilitation and

resettlement, and other disclosures

 Product labeling, product recalls and customer concerns about data privacy, cyber
security, and other consumer-related disclosures.

The SEBI ESG model adheres to international standards such as the Global Reporting
Initiative, Task Force on Climate-Related Financial Disclosures, and the Sustainability
Accounting Standards Board. It's encouraging to see the government taking steps to force
Indian corporations to account for externalities.

1.5 ESG Reporting

Large corporations are required by EU legislation to reveal some information about how they
operate and deal with social and environmental issues. The EU's directive, known as the non-
financial reporting directive (NFRD), recognizes that non-financial information disclosure is
critical for managing change toward a sustainable global economy by balancing long-term
profitability with social justice and environmental protection, and establishes rules for large
companies' disclosure of non-financial and diversity data.

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The Directive modifies the accounting directive 2013/34/EU (by inserting Article 19a) to
require the inclusion of non-financial statements containing information to the extent
necessary for an understanding of the undertaking's development, performance, position, and
impact of its activity, including, at a minimum, environmental, social, and employee matters,
human rights, and anti-corruption.

The EU has established recommendations to assist businesses in disclosing environmental

and social data, as well as standards for reporting climate-related data. In addition, the EU
has started a public consultation on the NFRD review.

The OECD Report of 2017 combines ESG reporting standards (voluntary and required) for
institutional investors and business disclosures throughout the world. According to the study,
most reporting obligations are optional ("comply or explain") and do not specify the
methodologies or metrics to be utilized.

A discussion paper titled "A Matter of Principles: The Future of Corporate Reporting" was
published by the Financial Reporting Council (FRC) of the United Kingdom (2020). Rather
than a single complete yearly report, the discussion paper recommends a network of
interconnected reports based on goals. Three reports are included in the proposals: a business
report, a comprehensive set of financial statements, and a new Public Interest Report. It also
aims to broaden the concept of materiality to include a broader variety of actions that have a
major impact on a corporation, rather than only accounting requirements.

1.6 ESG Rating

ESG information would be used by investors, institutional entities, and others to make
investment decisions through ESG ratings supplied by ESG rating organizations. This
evaluation and measurement are frequently used as the foundation for informal and
shareholder proposal-related investor engagement with corporations on environmental,
social, and governance (ESG) issues. Given the effect and dependency that corporate entities
have on the environment and society, ESG considerations can provide useful insights into
present and future environmental and social risks and possibilities. These ESG concerns may,

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in turn, have a direct or indirect financial influence on the entity's profitability and investment
returns. The following are the ESG criteria employed by major index providers:

Figure: 1.2 ESG criteria employed by major index providers

Despite the fact that ESG reporting has been implemented as a voluntary or required measure
in certain nations, the requirement of ESG rating has not been discovered to be legislated in
any country through specific rules. Institutional investors, proxy advisory companies, and
other firms, on the other hand, rely heavily on these ratings when making investment
decisions as part of a socially responsible investing strategy.

1.7 ESG in Indian Context

The Indian legal system has attempted to handle the many facets of ESG in a piecemeal
fashion.

For example, the board's report must include information on energy saving, technology
absorption, and other topics. The firm must identify measures taken or their impact on energy
conservation, activities taken to utilize other sources of energy, financial investment in
energy conservation equipment, efforts toward technological absorption, and so on.

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Furthermore, a director has a fiduciary responsibility to the community as well as to the
environment.

CSR initiatives can encompass a variety of socio-economic activities that must be reported
individually in the yearly report. The closest requirement, as detailed below, is Business
Responsibility Reports (BRR), which have been imposed only from an ESG standpoint.

1.8 What is a Corporate Social Responsibility Report?

The Business Responsibility Report is widely regarded as India's first move toward making
non-financial reporting mandatory. The program was one of India's answers to the UN
Guiding Principles on Business and Human Rights (UNGPs) and the Sustainable
Development Goals (SDGs). The NVG (National Voluntary Guidelines on Social,
Environmental, and Economic Responsibilities of Business) produced by MCA is based on
nine principles. Companies must be socially, economically, and ecologically responsible,
according to the rules. Businesses will have a greater grasp of the transformation process,
which will make their operations more accountable, according to the standards. Businesses
were required to follow certain criteria.

 Behave and govern oneself with integrity in an ethical, transparent, and accountable
manner.
 deliver goods and services in a sustainable and safe manner
 All employees, even those in their value chains, should be respected and promoted.
 All stakeholders' interests must be respected, and they must be responsive to them.
 Human rights must be respected and promoted.
 appreciate the environment and make efforts to conserve and restore it,
 When influencing public and regulatory policy, it is important to do so in a
responsible and open manner.
 encourage growth that is inclusive and equitable, and
 in a responsible manner connect with and give value to their customers

In 2012, the Securities and Exchange Board of India (SEBI) ordered that the top 100 listed
businesses by market capitalization publish a BRR from an ESG viewpoint as part of their

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listing criteria. In FY 2015-16, this was extended to the top 500 corporations. The scope has
now been expanded to include 1000 businesses. MCA published a Report of the Committee
on Business Responsibility Reporting in 2020, and SEBI published a Consultation Paper on
the Format for Business Responsibility and Sustainability Reporting in 2021.

Figure: 1.3 Corporate Social Responsibility Report

1.8.1 BRR Reporting in India

As part of its ESG study of Indian enterprises, the company has reviewed the disclosures
supplied under the BRR framework by the corporations.

 The least amount of sample firms responded favorably to disclosures on principle 7

out of the nine criteria (i.e., public advocacy). On all four criteria, it received the
lowest score.
 The lack of a specific/formal policy on public advocacy is one of the most common
grounds for not establishing a policy on principle 7. Companies, on the other hand,
have asserted that other policies address portions of principle 7. This may be due to
the fact that lobbying in India if it is done at all, is done in a non-transparent manner.
 The ideals of respect and supporting human rights and 'engagement and delivering
value to customers and consumers received the second-worst responses. These
notions, once again, are most likely still to be incorporated into our system.
 Principle 1 (ethics), principle 3 (employees), principle 4 (stakeholder), principle 6
(environment), and principle 8 (growth and equitable development – social
responsibility) all received higher favorable replies. This is due to the fact that some
of these rules are based on distinct Indian legislative obligations. As a result, most

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 businesses have explicit policies in place to ensure that they follow the law on these
principles.

Companies scored higher on policy disclosures, followed by governance, than on

environmental and social considerations, according to the survey. This may be due to the fact
that, during the last two decades, several regulatory authorities in India have turned
governance changes into legislation. Similarly, regulatory authorities are required to draught
a large number of policies. As a result, businesses have a higher score on policy disclosure
parameters.

1.8.2 Closing Thoughts

In terms of important categories, India's BRR Reporting goes a long way toward presenting
a comprehensive ESG scenario. Some structural improvements to the current format may
make reporting easier.

Furthermore, in comparison to environmental and social considerations, Indian corporations

are shown to do better in governance-related matters, owing to the presence of several
legislative requirements and regulatory oversight on a company's governance needs.
Companies, on the other hand, must enhance their environmental and social rankings.

1.9 ESG Scores

The most extensive ESG databases in the world, comprising over 70% of global market value
and more than 500 separate ESG metrics, with a history dating back to 2002. Refinitiv's ESG
ratings are based on company-reported data and are intended to quantify a company's relative
ESG performance, commitment, and effectiveness in a transparent and impartial manner.

This covers ten major topics like as emissions, environmental product innovation, human
rights, and shareholder interests, among others. We also give an overall ESG combined
(ESGC) score, which is adjusted to account for major ESG disputes that affect the companies
we, cover. Nearly 9,000 firms throughout the world have ratings, with time-series data from
back to 2002. The percentile rank scores are straightforward ( earlier that come in percentages

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and letter in grades term ranging from D- to A+). The ratings are based on the company's
sector (for environmental and social) and the nation of incorporation's relative performance
of ESG aspects (for governance). Refinitiv makes no attempt to define "good," instead
relying on statistics to evaluate industry-based relative financial or non finacial performance
within the framework of our criteria and data architecture. A number of major mathematical
concepts for Refinitiv's ESG score methodology are listed below. We've provided unique
ESG magnitude or materiality weightings - because the relevance of ESG practices varies by
industry to industry, we've mapped each metric's magnitude on a scale of 1 to 10 for each
industry.

Transparency stimulation – our study used technique that is based on business disclosure.
With applied weighting, failing to disclose "immaterial" data points has no impact on a
company's performance(score), but failing to report "very material" data points has a negative
impact on companies score.

ESG controversies overlay - we compare firms' actions against their pledges in order to
emphasize the impact of major controversies on overall ESG scores. By integrating severity
weights, which guarantee that controversy ratings are adjusted based on a company's size,
the scoring technique tries to alleviate the market cap bias that large firms face. Benchmarks
by industry and nation at the data point score level — to allow for comparative analysis
within peer groups.

To eliminate hidden layers of calculations, we used a percentile rank scoring methodology.

Refinitiv can provide a score between 0 and 100, as well as easy-to-understand letter grades,
using this technique.

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 Figure: 1.4 ESG Scores

The underlying ESG data framework is reflected in Refinitiv ESG scores, which are a data-
driven and transparent assessment of companies' relative ESG performance and capacity,
incorporating and accounting for company size biases and industry materiality. The ESG
score system used by Refinitiv follows a few fundamental calculating concepts (set out
below). An overall ESGC score is also produced, which takes into account news incidents
that have a meaningful influence on firms when calculating the ESG score. For all firms and
previous fiscal periods in the ESG worldwide coverage, i.e., back to the fiscal year 2002 for
about 1,000 enterprises, ESG scores are calculated and provided (mainly U.S. and European).

The model comprises two overall ESG scores:

i. ESG score - evaluates a company's environmental, social, and governance

performance using publicly available data.
ii. The ESGC score combines the ESG score with ESG controversies to offer a full
assessment of a company's long-term sustainability affect and behavior.
iii. Users can accept and use the scoring that suits their needs, mandates, or investment
criteria since the two overall ratings and underlying category assessments are
available.
iv. Over 500 business-level ESG indicators are captured and calculated by Refinitiv, with
186 (details in the ESG lexicon, accessible on request) of the most comparable and
material per industry powering the entire company evaluation and scoring process.

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 v. These are divided into ten categories, which reformulate the three pillar scores and
the final ESG score, which is based on publicly available data and reflects the
company's ESG performance, commitment, and effectiveness.

Environmental, social, and corporate governance pillar scores are derived from the category
scores. The ESG pillar score is a weighted average of the environmental and social category
weights, which vary by industry. The weights for governance are the same across all
industries. The pillar weights are standardized to a range of 0 to 100 percentiles.

Figure: 1.5 ESG Score

Based on the reported facts relevant to the ESG pillars, with the ESG controversies overlay
acquired from worldwide media sources, ESGC ratings give a balanced and comprehensive
evaluation of a company's ESG performance. This score's main goal is to deduct the ESG
performance score based on unfavorable media reports. This is accomplished by including
the effect of major, substantive ESG controversies in the overall ESGC score.

When a company is involved in an ESG controversy, the ESGC score is generated as the
weighted average of the ESG scores and the ESG controversies score per fiscal quarter, with
current disputes represented in the most recently completed period. The ESGC score is
identical to the ESG score when corporations are not involved in ESG disputes.

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1.9.1 ESG controversies category

On the basis of 23 ESG controversial subjects, the ESG controversies score is produced. If a
scandal arises during the year, the firm involved is punished, and this has an impact on their
total ESGC score and grading. If there are fresh developments relating to the unfavorable
event, the influence of the event may be evident in the next year. Suits, continuing legislative
debates, or penalties, for example. As the situation unfolds, all fresh media items are
recorded. The controversies score also considers market cap bias, which affects large-size
corporations since they receive more media attention than smaller-cap companies.

1.9.2 ESG Scores Influence on Firm Performance

Corporate social responsibility (CSR) is a voluntary concept in which businesses integrate

social and environmental issues into their company operations and interactions with
stakeholders. This is frequently proven by businesses by preparing some type of
sustainability report. The sustainability report might be a standalone document or a portion
of an annual report that covers or integrates social and environmental issues. Some of the
sustainability challenges those corporations address may also be reported on their websites.
There is no agreed-upon definition of sustainability (e.g., Constanza and Patten, 1995; Pope
et al., 2004; Bell and Morse, 2003), and attempts by various writers to come up with one
have left the word vague. Typically, the terms sustainability and sustainable development are
used interchangeably, with the latter being widely defined in the Brundtland Report of 1987
as "development that fulfills current requirements without jeopardizing future generations'
capacity to satisfy their own needs." In recent decades, there have been attempts to narrow
this definition, such as Elkington's (1998) triple bottom line model, which encompasses
economic, social, and environmental foundations. In recent years, an increasing number of
institutional investors pushing socially responsible investing (SRI) have made ethical
screening a requirement in their stock selection procedures. As a result, firms are under
increasing pressure to address not only analysts' worries about financial performance, but
also environmental, social, and governance (ESG) problems, which are now commonly
referred to as ESG.

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Companies that address ESG concerns that are materially significant to their stakeholders
and incorporate some of these factors into their main business strategy are considered to have
effective sustainability practices. This is in opposition to Friedman's capitalist view that
"corporate managers' only moral obligation is to their shareholders, and that the only social
responsibility of business is to use its resources and engage in activities designed to increase
profits as long as it stays within the rules of the game, that is, engages in open and free
competition, without deception or fraud" (1962, p. 133)

While there is a widespread belief that incorporating sustainability practices into companies
will improve company performance, evidence for this belief comes primarily from qualitative
surveys (for example, Maier, 2007; Boston College Centre for Corporate Citizenship, 2009;
Ernst and Young, 2002; KPMG, 2005), many of which are not rigorously conducted and rely
heavily on opinion. As a result, a thorough investigation of the link between the number of
sustainability practices and company performance is required.

Existing research on the influence of sustainability practices on a company's overall

performance focuses on specific ESG criteria rather than taking a holistic approach (see, for
example, Clarkson et al., 2008; Polloe, 2010; Benito and Benito, 2005). Furthermore, rather
than incorporating a wide range of financial ratios to provide a good and accepted
benchmarking of a company's financial performance, characteristics, and credentials
(Abramson and Chung, 2000; Brammer et al., 2006; Gompers et al., 2003; Statman, 2000;
Cortez et al., 2009; Edmans, 2007; Oehri, 2008; Olsson, 2007), company performance is
often narrowly defined (Abramson (Barnes, 1987; Balatbat et al., 2010).

It is prompted by a dearth of academic research on the relationship between ethical and

sustainable practices and business performance, notably in India, where mainstream investors
are beginning to include ESG considerations in their investment decision-making processes.
This is illustrated by the increasing number of Indians who manage global assets. Despite the
widespread use of ESG research in India, prominent data providers such as Bloomberg and
KLD Research and Analytics (now part of MSCI) mainly track the ESG performance of large
corporations. Companies from India that are included in the S&P 500 Index. Corporate
Analysis Enhanced Responsibility (CAER), the Australian research arm of the UK-based

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Ethical Investment Research Services, created the ESG ratings (EIRIS). EIRIS is a non-profit
global source of unbiased research into firms' ESG performance. This database enabled us to
conduct an empirical assessment of ESG practices among the top 300 listed firms in India
from 2008 to 2010. We investigate the relationship between business performance and ESG
scores, where firm performance includes both accounting and market performance and is
represented by profitability ratios (five measures) and equity valuation (seven measures). We
also look at business performance by examining portfolio returns and analyst projections.

Practitioners, academics, and policymakers are interested in whether ESG practices impact
corporate financial performance. Based on the examination of different industrial sectors, the
best and worst performing industry sectors in terms of socially responsible activities may be
compared. Benchmarking across particular firms is also possible with this approach. The
value of investing in ESG practices may be examined using the correlation analysis, albeit it
should be noted that research so far indicates that different measures used to reflect both ESG
and financial success might result in different findings.

1.10 Corporate Governance

The notion of "government" dates back to the dawn of human civilization. Simply said,
governance is the process of making decisions and the process of implementing or not
implementing those decisions. It may be used for corporate governance, and international,
national, and municipal governance, among other things. Corporate governance deals with
issues that arise as a result of ownership and control is separated. Corporate governance is
concerned with various structures and procedures that maintain the right internal structure
and rules of the board of directors, as well as the formation of independent committees,
regulations for information disclosure to shareholders, and managerial control.

Due to high-profile scandals such as Worldcom, Enron, Xerox, Harshad Mehta fraud, the
Satyam scam, and others, the topic of corporate governance has gotten a lot of attention these
days in both developed and developing countries. Investor trust has been weakened as a result
of these frauds, making it harder for businesses to raise cash on the stock market (Agrawal,
2005). These frauds also emphasize the need to improve company governance and

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accounting transparency. Corporate governance and corporate management are seen to be
distinct.

A strong corporate-governance system aids a country's long-term development; poor ones

frequently result in major issues. Governance quality has become a vital success element
for survival and a source of competitive advantage; it has also become a major factor
affecting a company's capacity to raise financing from capital markets (Aggarwal et al.,
2007). Transparency, fairness, accountability, and responsibility in the marketplace are all
benefits of strong corporate governance

Figure: 1.6 Four Pillars of Corporate Governance

The key participants in corporate governance are shareholders, the board of directors, and
management officials. Due to the separation of ownership, control, and management, the
board of directors is the most powerful actor in corporate governance concerns. Shareholders
are the legal owners of the firm, but because they live in different areas, it is impossible for
them to keep track of all of the company's activities. As a result, they nominate directors on
their behalf in order to safeguard their stake in the firm. The board of directors appoints
managers to oversee the organization's day-to-day operations and these managers report to
the board.

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Between management and stockholders, the board of directors serves as a go-between. The
board of directors is accountable to the shareholders for all of the management actions. Board
structure in terms of separation of authority between chairman and CEO, board size, board
composition in terms of proportion of executive, non-executive, independent, and nominee
directors on the board, knowledge, skill, and abilities of board members, and common
understanding between directors at the time of decision-making are all factors that influence
good corporate governance. The board of directors is primarily responsible for making
strategic choices, creating objectives, formulating and implementing policies, and evaluating
the CEO and other management personnel's performance. The board of directors not only
directs managerial people but also bears responsibility for management.

Corporate governance is a difficult subject to grasp since it encompasses so many distinct

facets. Corporate governance is a collection of measures that organizations employ to reduce
agency costs and maximize company value by minimizing the divergence of interests
between managers and shareholders. Corporate governance is a broad term that encompasses
many different aspects. It may be separated into two types of mechanisms: internal
mechanisms such as ownership structure, board composition, board committees, executive
compensation, and information disclosure and transparency, and external mechanisms such
as anti-takeover measures and the corporate control market (Denis & McConnell, 2003;
Cremers & Nair, 2004).

Different board committees, such as the audit committee, compensation committee,

shareholders and investor complaints committee, nominating committee, and other
committees, have been established to oversee all of the organization's operations. Corporate
governance is becoming increasingly important these days. It is interdisciplinary in nature
because of its connections to economics, accounting and finance, law, and other fields.

1.10.1 Models of Corporate Governance

Corporate governance models are multi-dimensional descriptions of several approaches of

controlling a company. The corporate governance structure differs per nation. As a result,

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there is no single model that is widely acknowledged. In general, there are two types of
corporate governance models.

 Single Tiered Model

 Two-Tiered Model

1.10.1.1 Single-Tiered Model

The Anglo-American Model, also known as the Anglo-Saxon Model, the Shareholder's
Model, and the Unitary Board Model, is a single-tiered model. The United States, the United
Kingdom, Canada, Australia, Turkey, and a few Commonwealth nations all use this
approach. This concept is based on a well-known stock exchange and a single board of
internal and outside directors. This approach comprises a single board of directors that
includes both executive and non-executive directors. Executive and non-executive directors
represent inside and outside directors. In a single board, the Chairman and CEO were both
the same person. The separation of ownership and control is key to this approach. Separation
costs are referred to as Agency costs. The board's primary players include directors,
management, and shareholders. Shareholders have the right to choose the members of the
board of directors who will serve as agents for the other half of the shareholders. Board
members have three responsibilities: strategy design, managerial oversight, and shareholder
accountability. This paradigm undercuts trade unions' influence and prevents labour from
participating in strategic decision-making. This approach is primarily concerned with the
needs of shareholders. This methodology does not address the needs of other stakeholders.

1.10.1.2 Two-Tiered Model

This model, as its name implies, includes two boards: a supervisory board and an executive
board. There is a distinction between those who watch the firm and those who run it. This

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concept is followed by Austria, France, Germany, Holland, and a number of other European
nations. The two-tiered model can take the following shapes:

 German Corporate Governance Model

 Japanese Corporate Governance Model

i. German Corporate Governance Model

The German corporate governance model is based on a dual board structure and a less
developed market. The German model is also known as the Continental Europe model
or the two-tiered board model. Germany, the Netherlands, Holland, France, and
Switzerland all use this model. Employees and workers are valued in this paradigm
since they are included in the decision-making process. This methodology takes a
collaborative approach and prioritizes the requirements of all stakeholders. In this
paradigm, one person cannot occupy both roles at the same time. Shareholders
appoint 50% of the supervisory board members, while employees and labor unions
choose the remaining members. The supervisory board also appoints the executive
board's managers and other members. Members of the management board are
accountable to the supervisory board for the company's operations.

Figure: 1.7 Structure of the German Model of Corporate Governance

(Source: Adopted from Raju, 1998)

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1.10.2 Japanese Corporate Governance Model

It incorporates dual board elements and is stakeholder-oriented, similar to the German

corporate governance model. However, there are some distinctions between the German and
Japanese models in terms of employee involvement, management monitoring mechanisms,
and board structure. The cultural relationship in Japan and the consequences of the Keiretsu-
Bank system are the key causes of these differences. Financial institutions play an essential
part in the governance system under this paradigm. The “Network Paradigm” is another name
for this model. A president and a board of directors make up the supervisory board. The
members of the supervisory board are appointed by both the shareholders and the main bank.
The president of the corporation receives power from the board. He establishes a network of
relationships with a variety of enterprises. This approach encourages workers to participate
in the firm's governance while also expecting them to be loyal and committed to the
organization.

Figure: 1.8 Structure of Japanese Model of Corporate Governance

(Source: Adopted from Saba, 1997)

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1.10.3 Indian Model of Corporate Governance

The Indian corporate governance model has elements from both the Anglo-American and
German models. There are several sorts of corporations operating in India, including public
corporations, private corporations, and public sector undertakings (it includes banks and
financial institutions, government companies, etc.). In India, the shareholding arrangement
of various corporations differs. In the case of a private company, the promoters and their
family members hold the majority of the company's control. The corporation is primarily
funded through retained earnings and loans, with outside investors playing a minor role. In
the case of public corporations, board members are selected by the state and federal
governments, and these businesses are more concerned with the government's interests than
with shareholders' desire to maximize their income. Banks, insurance companies, and
financial organizations are all controlled by separate laws and regulations. The Companies
Act of 1956 governs Indian businesses. Since 2000, many corporate governance changes in
India have attempted to make the system more efficient and effective.

Figure: 1.9 corporate governance, accountability and enterprise – Indian model for
PSUs

(Source: Adopted from Raju, 1998)

Corporate Social Responsibility (CSR) has become one of the industry's benchmarks in
recent years. Companies who follow these guidelines are rewarded and have improved their
overall reputation. Strategic access to CSR is critical to a business's competitiveness. It has

26
numerous advantages in terms of customer relations, risk management, innovation ability,
capital access, human resource management, and so on. The term "corporate social
responsibility" is used in practically every business context around the world. Back in the
1950s, the word CSR was derived from the term Social Responsibility.

Bowmen meant "businessmen's obligations to implement those strategies, to make those

judgments, or to pursue those diverse acts which are particularly desirable in terms of our
society's goals and values" by the Social Responsibility of Businessmen (DOUG, &
CAULKINS, 2013). Bowmen essentially tied corporate accountability to societal duty. The
majority of research found that in the 1970s and 1980s, attention was focused on more clearly
expressing what firms' duties were. In the 1990s, most businesses established sophisticated
tactics to communicate their contributions to society's well-being.

Many major corporations have taken the initiative and stepped forward to contribute to
corporate social responsibility. Robert Wood Johnson, the founder of Johnson & Johnson,
created their CSR philosophy in 1943, making it one of the first companies to do so. Milton
Hershey, the creator of the Hershey Company, crafted a society and a town with skill, civic
centers, and cultural organizations that continue to thrive today. Many initiatives were taken
in the first half of the twentieth century, and founders realized that their stakeholders
extended beyond the boardroom and that the only way to build a successful and prosperous
business was to create a healthy and vibrant environment for their customers and
communities.

Companies strive to extend their operations in order to increase profits, but they are also
accountable for the impact they have on people and the environment. The term "people" here
refers to the company's owners, workers, suppliers, distributors, consumers, partners,
community, and government (Ahmed, et al., 2011). Businesses are in charge of generating
wealth and societal well-being. A business must be socially responsible in order to be more
lucrative and competitive in the market.

Companies nowadays are increasingly concerned with their favorable image in the market
they operate in, thus CSR strategies are given a lot of thought. CSR is a self-regulatory
business model that allows a firm to be socially accountable to itself, its stakeholders, and

27
the general public. CSR seeks engagement from both internal and external stakeholders,
allowing businesses to take advantage of changing operational conditions and societal
expectations. This implies it may also assist businesses in seizing actual possibilities for
expansion and development of new markets.

Corporations can build and retain long-term trust among their workers, customers, and
citizens as the foundation for sustainable business strategies. This, in turn, improves the
climate in which a firm may innovate and develop. Companies benefit from CSR because it
generates favorable word of mouth. Doing good for the community, stakeholders, partners,
and consumers will not only assure long-term success and growth, but will also propel the
company to new heights. It is critical in making a brand well-known not just among rivals,
but also among the media, other enterprises, and individuals who are direct clients for
businesses.

Companies that take the effort to deliver power to a hamlet, supply a basic need to
impoverished people, educate poor children, plant trees for a better environment, and provide
job chances to people, among other things, build favorable feelings in customers about a
brand. Positive word of mouth eventually leads to increased revenue for the business. CSR
also offers employees an unrivaled sense of enjoyment and strengthens employee bonds. It
fosters a culture in which workers work together as a team to achieve the company's
objectives. Employees get a sense of loyalty as a result, and they participate in Corporate
Social Responsibility initiatives freely. Many big corporations are beginning to recognize
ESG as a viable alternative to CSR. CSR is a company's effort to have a beneficial influence
on its surrounding community, the environment, customers, and workers. It's a self-
regulatory agreement that huge corporations report on every year. ESG, on the other hand,
assesses a company's operations and behaviors. Companies' ESG performance is becoming
a major concern. Shareholders are more interested in companies that actively participate in
social activities. Environmental, Social, and Governance (ESG) are three crucial aspects to
consider when determining the long-term viability and moral effect of a corporate project.

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1.11 Environmental Factors' Influence on Financial Performance

Global warming and climate change are the world's most serious environmental crises. This
issue will have repercussions for the planet's future from a variety of views. As a consequence
of public awareness of the challenges posed by climate change, new environmental
regulations have evolved. Environmental accounting is one of the components that contribute
to corporate governance. It is inspired by the prospect of environmental accounting achieving
long-term growth and development. The relevant data were analyzed utilizing content
analysis of the annual report of the firm. According to the paper, the availability of
environmental disclosure rules in India and financial success produces contradictory effects.
Because environmental accounting is evolving and increasing as public awareness of
environmental issues rises, this topic is still being contested at the international and national
levels. There are no such legislation or regulatory obligations in India for enterprises to report
environmental sustainability information.

Environmental accounting was introduced in India in the late 1990s and is now one of the
components of corporate governance. Environmental information is one of the factors
provided in corporate social obligations (CSR). Although environmental accounting began
as voluntary disclosure, it has swiftly acquired favor as a way of expressing stakeholder
duties, particularly in developing countries like India (ACCA, 2002). Since the corporate
community recognized it as a key worry, the accounting profession and governmental
authorities addressed the issue of maintaining a proper record of environmental performance
(Rezaee, Szendi, and Aggarwal, 1995). The business sector was becoming more aware of the
need of disclosing environmental information.

The purpose of environmental accounting is to assure long-term growth and development

while also preserving a positive connection with the community (Ministry of the
Environment, 2005). Environmental accounting is a type of accounting that focuses on
environmental issues (Mahenna and Dorweiler, 2004). It's also an important part of
accounting. As public knowledge of environmental concerns rises, environmental accounting
evolves and expands, raising the bar for assessing environmental effects (Mahenna et al,
2004). The International Organization for Standardization (ISO) introduced the ISO 14000
series of standards, which cover various aspects of environmental management, in order to

29
provide practical tools for businesses to improve their environmental performance while also
increasing their productivity and success (Abdullah and Fuong, 2010).

Unfortunately, there are no such standards or legal obligations in India for businesses to
submit environmental sustainability information (ACCA, 2002). Despite the fact that the
India Accounting Standard Board (IASB) does not have a specific standard on environmental
disclosure as a guideline for preparing environmental disclosure in a company annual report,
paragraph 10 of FRS 101, Presentation of Financial Statements, encourages entities to
prepare an environmental report in addition to the financial statements they provide
(Buniamin, 2010). Aside from that, there is a requirement under the India Environmental
Quality Act 1974, which is currently being used as guidelines by Indian companies for
managing and disclosing their environmental sustainability, as Section 33A of the Act
specifies an environmental audit and Section 34A specifies a report on the environmental
impact as a result of prescribed labelling (Bursa Malaysia, 2012). When it comes to
constructing an environmental sustainability disclosure, the Act rules are the sole guiding
principles; nevertheless, the information to divulge is up to the company.

Environmental awareness across diverse stakeholder groups is not a new phenomenon

(Johnson, 2005). Numerous types of research on environmental disclosure have been
conducted (Nilandri, Pattanayak, and Mitali, 2008). Nowadays, there is a strong desire for
businesses to employ environmental disclosure to help preserve the planet, and it has been
demonstrated that businesses who do so may achieve positive effects. The availability of
environmental information has a variety of financial implications. The issue to be answered
is whether or not a company's environmental disclosure has an influence on its financial
performance. The goal of this research is to see how environmental disclosure reporting
affects financial performance.

1.12 Green Rating of Indian Companies

Many nations track environmental performance at the global, national, state, district, and
local levels. Corporate environmental reporting, on the other hand, is optional. Despite the
fact that a large number of businesses have received ISO 14000 certification, only a handful

30
of them make their environmental performance public. Over 700 enterprises in India have
already received ISO 14000 accreditation, according to reports. As a result, they must
demonstrate continuous progress in their environmental performance, which entails setting a
goal and attaining it. Unfortunately, the majority of these businesses keep their environmental
performance a secret.

Government authorities have failed to urge people to report, which is part of the cause of this.
In reality, they do not educate the public that there is a continual debate on how to resolve
tough contrasts between environment and development, therefore creating a force that can
overcome the existing immobility.

India is still in the process of industrializing, urbanizing, and motorizing. However, it is

already extremely polluted, with certain urban areas perhaps contaminated more than
anywhere else on the planet. Many cities are plagued by severe air pollution, while rivers in
others have devolved into sewers. These have a negative influence on the environment and
public health, lowering the quality of life, particularly in metropolitan areas where pollution
is concentrated. Pollution is only going to get worse as the economy grows. It may swell to
uncontrollable dimensions, as it did in the 1950s and 1960s throughout the industrialized
world.

The Green Rating of vehicle businesses was complicated since it was based on corporate
governance, proactive measures, and product life cycle analysis because corporations
manufactured goods in several segments and models. In contrast to the pulp and paper
business, where all firms engaged, a total of 29 companies were chosen for Green Rating,
with three refusing to participate. The environmental performance was very inadequate.
Although automobiles have an environmental effect throughout their product life cycle, less
than half of them had an environmental policy, and of those that did, less than half had
addressed the environmental element of the product in their policy. The consumer is
responsible for the effect throughout the life of the vehicle, yet there is no helpful
environmental disclosure in the product handbook.

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1.13 Problem statement

The practice of ESG remains a complex and controversial phenomenon. From a research
perspective, a large number of empirical studies have analyzed the linkages between ESG
performance and financial performance (Ambec and Lanoie, 2008; Margolis and Walsh,
2003; Orlitzky et al., 2003; Allouche and Laroche, 2005; Griffin and Mahon, 1997). A
majority of studies indicate a positive Relationship, but some results are contradictory, i.e.,
reporting negative or non-significant results and different causal impacts (Margolis and
Walsh, 2003; Orlitzky et al., 2003). The specific problem is that there has been minimal
research into the factors that force corporate leaders to implement ESG. This study was a
response to Fischer and Sawczyn (2013), this study was not only interested in the effect of
ESG performance and the financial performance in total but also a deeper study of all three
components E, S & G factors on the financial performance of the corporates.

1.14 Purpose of the study

Although researchers have used many approaches to examine the various outcomes of ESG
implementations, still there are limited studies about the motives or the benefits for which
firms continue to invest in ESG activities. The purpose of this study is to find the impact of
ESG on a company’s performance totally and individually. The sample contains Indian
companies that shall be recognized as sustainable promotors for ESG values.

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1.15 Need for study

1. Contribution to the existing literature on strategy and business policy: This study
contributes to theories in strategy and business policy in India, and to one of their major fields
of application is business sustainability.

2. Contribution to corporate managers and business strategists: This Study will be a

useful insight for corporate managers and business strategists. This study first analyses
antecedents of sustainability disclosure. It, therefore, provides strategists with the keys to
understanding the extent of their sustainability disclosure. This study argues that firms
accommodate their disclosure to their estimated degree of reputation and sustainability
performance.

3. Contribution to Social Change: This study set an example of corporations that succeeded
in the continuous promotion of social responsibility values, other organizations can also use
the model to implement positive social changes within their environment.

1.16 Objectives of the study

The objectives are developing in collaboration with the Indian companies in order to be
relevant and useful to the actors in the financial sector, this study is mainly focused on the
following objectives:

1) To find the impact of ESG scores on the financial performance of Indian companies.

2) To examine the effects of Environmental factors on the financial performance of Indian

companies.

3) To examine the link between social practices and financial performance.

4) To study the impact of corporate governance (CG) practices on the financial performance
of Indian companies.

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1.17 Chapter scheme

The remainder of the thesis is structured in the following way. Chapter 2 presented a review
of the literature on ESG and firm performance the various countries in the world. On the
basis of previous studies, this chapter objectively reviews the ESG (Environmental, Social,
and Governance) frameworks of focused firms and the ESG impact on the financial
performance of companies (market-based accounting-based). A methodological framework
was presented in Chapter 3. This chapter introduces the method of data collection, research
design, sample design, selection of the sample, description of proxies used in the study,
econometric approaches for data analysis, and models for evaluating ESG & financial
performance in Indian-focused and diversified businesses. Chapter 4 describes the results
and discussions of ESG’s impact on the financial performance of Indian companies. Chapter
5 includes the conclusion, limitations, and future possibilities of this research study. Finally,
this study finishes with a scope for future research opportunities

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