Exploring the Moderating Role of Innovation Capabilities in the ESG Disclosure–Firm Performance Relationship: Evidence From an Emerging Market

ABSTRACT This study examines how innovation capabilities moderate the relationship between ESG (Environmental, Social and Governance) disclosure and firm performance for Nifty 500 firms from 2015 to 2025. Firm performance is measured using ROE, ROA, and Tobin's Q, while innovation is captured through R&D intensity, technical know‐how (TKH), and patents, representing both tacit and codified forms of knowledge. The study employs fixed‐effects panel regression, with Driscoll–Kraay standard errors, panel‐corrected standard errors (PCSE), and system GMM employed to ensure the reliability and robustness of the findings. The results show that ESG disclosure has a positive effect on profitability, operational efficiency, and market valuation. The sub‐components further reveal that Environmental (ENV), Social (SOC), and Governance (GOV) dimensions individually contribute to improved firm performance, although the magnitude of these effects varies across performance measures. R&D intensity and technical know‐how consistently strengthen the positive effects of ESG disclosure and its sub‐components ENV, SOC, and GOV dimensions, suggesting that firms with greater learning capacity and technological depth are better equipped to convert sustainability commitments into superior financial and market results. Patents exhibit mixed moderating effects, dampening accounting‐based performance while improving market valuation by signaling long‐term technological potential. Overall, the findings underscore innovation as a critical capability through which ESG disclosure translates into superior firm performance, suggesting that managers should integrate ESG initiatives with investments in innovation capabilities to maximize the performance benefits of ESG, while policymakers should strengthen ESG disclosure frameworks and promote innovation‐oriented policies to foster sustainable corporate growth in emerging markets.