Demystifying the efficiency in managing the working capital through the lens of sustainability

Purpose This study aims to scrutinize the role of environmental, social and governance (ESG) performance and its indicators in achieving working capital management (WCM) efficiency. Design/methodology/approach Using a sample comprising 520 firm-year observations from Indian listed firms for the period from 2017 to 2021, the current study estimates WCM efficiency using the Banker, Charnes and Cooper (BCC) input-oriented model of data envelopment analysis (DEA). In addition, this study performs baseline, robustness and heterogeneity tests to examine the effect of ESG performance and its components on WCM efficiency. Findings Our findings show that firms with high ESG performance better manage short-term liquidity. Also, environmental performance (EP), social performance (SP) and governance performance (GP) highlight a similar positive association with WCM efficiency. As per the heterogeneity test results, both high- and low-sustainable firms showcase the necessity of ESG performance to achieve efficiency in managing their working capital. Practical implications The findings emphasize the need for managers and policymakers to integrate sustainable practices with financial strategies, enhancing both short-term stability and long-term sustainability goals and thereby guiding effective policy and governance enhancements. Originality/value We attempt to adjudicate the role of sustainability on WCM efficiency from an emerging country perspective, which has not yet been explored. Our study also makes a methodological contribution by pioneering the DEA in the context of ESG and working capital.