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<p>This study examines the impact of Environmental, Social, and Governance Performance (ESGP) on the cost of equity (CoE). It focuses on sensitive industries (SI) and non-sensitive industries (NSI) for Nifty 200 listed Indian companies from 2014 to 2022. It employs quadratic non-linear models on a fixed effect panel dataset comprising 480 firm-year observations. This study also utilizes the Generalized Method of Moments (GMM) technique to address potential endogeneity issues. Further, robustness tests are conducted by using CoE calculated using Country Risk Premium (CRP) approach to validate the findings. The non-linear model reveals an inverted U-shaped relationship, where ESGP initially increases CoE until a threshold point, after which CoE decreases. Further, the disaggregated analysis shows that investments in environmental (ENV) and governance (GOV) activities in SI, initially increases CoE, but beyond a threshold point CoE reduces (inverted U-shape). Conversely, in NSI, further investments in ENV and GOV lead to an increase in CoE (U-shape). The findings provide valuable insights for managers, helping them develop sustainable policies and formulate strategies to balance cost and value trade-offs based on industry characteristics. The integration of ESG practices enhances stakeholder trust and promotes long-term stability of the firm through sustainable practices. This research is original in exploring the non-linear relationship between ESGP and CoE in India, identifying the threshold where the relationship shifts from cost to benefit. It shifts the focus from “if it pays to go green” to “when” and “for whom” adopting green practices is beneficial, offering unique insights into ESG dynamics.</p>

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ESG Cost or Benefit? Unveiling the Non-Linear Relationship Between ESG Performance and Cost of Equity in India

  • 期刊论文

  • 发表日期：

    2026年7月29日

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  • Karishma Salian,
  • Sapar Narayan Rao,
  • Trupti Mishra

摘要

This study examines the impact of Environmental, Social, and Governance Performance (ESGP) on the cost of equity (CoE). It focuses on sensitive industries (SI) and non-sensitive industries (NSI) for Nifty 200 listed Indian companies from 2014 to 2022. It employs quadratic non-linear models on a fixed effect panel dataset comprising 480 firm-year observations. This study also utilizes the Generalized Method of Moments (GMM) technique to address potential endogeneity issues. Further, robustness tests are conducted by using CoE calculated using Country Risk Premium (CRP) approach to validate the findings. The non-linear model reveals an inverted U-shaped relationship, where ESGP initially increases CoE until a threshold point, after which CoE decreases. Further, the disaggregated analysis shows that investments in environmental (ENV) and governance (GOV) activities in SI, initially increases CoE, but beyond a threshold point CoE reduces (inverted U-shape). Conversely, in NSI, further investments in ENV and GOV lead to an increase in CoE (U-shape). The findings provide valuable insights for managers, helping them develop sustainable policies and formulate strategies to balance cost and value trade-offs based on industry characteristics. The integration of ESG practices enhances stakeholder trust and promotes long-term stability of the firm through sustainable practices. This research is original in exploring the non-linear relationship between ESGP and CoE in India, identifying the threshold where the relationship shifts from cost to benefit. It shifts the focus from “if it pays to go green” to “when” and “for whom” adopting green practices is beneficial, offering unique insights into ESG dynamics.