ESG RATINGS AND INVESTMENT DECISION- MAKING INTHE INDIAN MARKET: AN EMPIRICAL ANALYSIS

Abstract

This study addresses a central question in modern finance: How do Environmental, Social, and Governance (ESG) credentials of a company actually influence investment behavior within the dynamic context of the Indian market? Drawing on a robust panel dataset of 200 NSE-listed firms from 2018 to 2022, this study applies rigorous econometric techniques to quantitatively assess the impact of ESG metrics on corporate financial performance and institutional investment patterns within the Indian economy. The investigation reveals compelling evidence of a "statistically significant positive relationship between ESG metrics and financial outcomes", with governance factors demonstrating the strongest association among all ESG components. Specifically, governance scores exhibit a robust coefficient of 0.052 (p < 0.01) in relation to "Return on Assets", substantially exceeding the impact of environmental and social factors, which remain statistically non-significant despite positive coefficients. This finding highlights that in India, governance is the bedrock of investor trust. Given the country's unique corporate history, robust governance frameworks are not just one part of ESG; they are the primary mechanism through which companies can overcome concerns about transparency and control. As a result, the market places a tangible financial premium on firms that demonstrate a clear commitment to these best practices. A particularly noteworthy discovery emerges in the differential approaches between foreign and domestic institutional investors toward ESG integration. Foreign institutional investors demonstrate markedly stronger preferences for companies with comprehensive ESG frameworks, with effect coefficients more than double those observed for domestic institutional investors (0.152 versus 0.068). This differential suggests an "ESG importation" phenomenon, whereby global institutional capital serves as a primary transmission mechanism for sustainability standards into emerging markets. The implementation of "SEBI's Business Responsibility and Sustainability Reporting framework" represents a critical regulatory intervention whose impact is empirically quantified. The research demonstrates that the ESG-performance relationship strengthened significantly following BRSR implementation, with the interaction effect showing a coefficient of 0.024 (p < 0.05), representing an approximately 83% increase in effect size from the pre-regulatory period. Sectoral analysis reveals substantial heterogeneity, with the strongest associations observed in energy, manufacturing, and utilities, sectors characterized by high environmental impact and regulatory scrutiny. This study provides a firm empirical anchor for the conversation around ESG in India's unique economic landscape. By leveraging robust econometric techniques, the findings offer critical, data-backed insights that can help investors refine their theses, corporations build more resilient strategies, and policymakers navigate the complex intersection of finance and sustainability with greater confidence.