ESG reputation and the possibility of energy inefficiency: does stakeholder perception conceal the adverse effects of compromised legitimacy?

Purpose This study aims to investigate whether a firm’s environmental, social and governance (ESG) reputation moderates the relationship between energy intensity (power, fuel and water expenses per unit of sales) and market valuation. Specifically, it explores whether a strong ESG reputation shields firms from the adverse financial consequences of energy inefficiency. Design/methodology/approach Panel data analysis is conducted on six years of data (2017–2022) of 131 non-financial firms listed on the Nifty 200 index of the Indian National Stock Exchange. The main sample is split into 61 ESG and 70 non-ESG firms based on their ESG reputation. In this study, ESG reputation is proxied as the listing status of firms on the Nifty ESG-100 index. Findings An increase in energy intensity negatively impacts the market valuation of non-ESG firms but positively affects the valuation of ESG firms. ESG reputation subdues the adverse effects of energy inefficiency on firm valuation. It can be inferred that ESG reputation provides a halo effect, whereby strong ESG standing shields firms from the usual penalties of energy inefficiency. Originality/value This study uniquely highlights the paradox wherein ESG reputation is likely to weaken investor scrutiny of energy inefficiency, potentially leading to overestimating firm value. The study demonstrates originality through its contextualized analysis of the relationship between ESG reputation, energy efficiency and firm valuation, contributing to discussions on corporate sustainability, market valuation and stakeholder expectations.