Do the ESG performance metrics mitigate managerial discretion? Insights from Nifty ESG 100 index

Purpose This study aims to investigate the role of the ESG framework in regulating the accrual and real-based managerial discretionary practices in the first ESG-based index (Nifty ESG 100 index) in India. Design/methodology/approach The modified Jones Model and Roychowdhury Model were used for estimating the Earnings Management (EM) proxies. The study covers 82 companies (492 firm-year observations) during the period FY 2018–2019 to FY 2023–2024. Multivariate fixed-effect regression was used to analyze the bidirectional relationship between EM proxies and the pillars of the ESG framework. Findings The study reveals that the implementation of the ESG framework is effective in reducing EM practices. The study also reveals that among the three pillars of ESG, the Governance (G) pillar is more effective than the Environmental (E) and Social (S) pillars in regulating managerial discretion. Even though the total EM was lower during the pandemic period, firms used current accruals as a tool to signal their performance. Research limitations/implications Findings of the study can aid policymakers and managers in enhancing the environmental and social initiatives of Indian corporates. As far as the ESG ratings in India are concerned, different agencies produce different scores for the same entity, which affects the reliability and comparability; SEBI should consider the compilation of an integrated ESG rating system to protect the interests of the investors in the long run. Originality/value The study contributes to the existing literature by analyzing the bidirectional relationship between EM and the three dimensions (Environmental, Social and Governance pillars) of the ESG framework. The present study is limited to the large-cap nonfinancial companies, and future studies can explore sector-wise ESG engagements and/or corporate sustainability among the small-cap and mid-cap companies in India.