The ESG–Financial Performance Nexus in Startups: A Multi-Level Contingency Framework in the Emerging Economy

This study investigates the relationship between Environmental, Social, and Governance (ESG) performance and the financial performance of startups in emerging economies. We posit that strong ESG practices serve as a critical signal of quality and legitimacy, helping to alleviate the liability of newness by mitigating information asymmetries for external stakeholders. Analyzing a longitudinal dataset of startups, we find a positive main effect of ESG on financial performance. Further, we demonstrate that this relationship is contingent on factors at multiple levels. The positive effect of ESG is weakened in contexts of high firm digitalization, greater analyst coverage, and developed regional institutions, as these factors act as substitutes by providing alternative sources of credible information, thereby reducing the unique signaling value of ESG. Conversely, intense industry competition amplifies the ESG advantage, as the signal becomes more critical for differentiation. Our findings contribute by shifting the ESG discourse to the entrepreneurial context and offering a nuanced, multi-level understanding of when a firm’s sustainable investment is most pivotal as a strategic asset for startups navigating institutional voids.