Exploring the Relationship of Environmental, Social, and Governance (ESG) Scores on Firm Performance: An Empirical Analysis

Understanding whether sustainability initiatives enhance financial performance is a central concern in management and finance research. Using Environmental, Social, and Governance (ESG) scores as a proxy for sustainability, this paper examines their temporal effects on firm profitability in the Indian automotive sector. The analysis applies structural equation modeling, specifically cross-lagged panel path analysis, to a panel of 26 firms. The results reveal a significant positive relationship between ESG scores in 2020 and return on assets (ROA) in 2021, but an insignificant negative association between ESG scores in 2021 and ROA in 2022. Subcomponent analysis shows distinct patterns: the Environmental score in 2020 significantly predicts higher ROA in 2021, but its effect in 2021 on 2022 ROA is weaker and insignificant; the Social score has an insignificant positive effect in the first period but a significant negative effect in the second; and Governance scores display positive and negative associations across the two periods, though neither is statistically significant. Across models, fit indices are mixed: χ²/df, the Comparative Fit Index (CFI), and the Tucker-Lewis Index (TLI) generally indicate good fit, while the Root Mean Square Error of Approximation (RMSEA) points to poor fit. These findings underscore the nuanced and time-sensitive nature of ESG-financial performance linkages in emerging economies. The study offers insights for investors, fund managers, and corporate leaders seeking to evaluate sustainability initiatives in the Indian automotive industry.