Can Financial Flexibility Unlock the Value of Corporate Sustainability? Evidence from ESG-Rated Firms

This study evaluates the relationship between ESG performance and firms’ financial performance in listed firms of India and investigates corporate cash holdings as an independent determinant and moderator. Using balanced panel data from 896 Indian firms during the years 2022–2025, ESG scores are obtained from CRISIL ESG Ratings and financial data from CMIE Prowess. The analysis uses Fixed Effects (FE) with firm level clustered standard errors, Two-Way Fixed Effects (TWFE), and Panel-Corrected Standard Errors (PCSE). ESG endogeneity is assessed using a leave-one-out industry-year instrument and Durbin–Wu–Hausman testing. ESG performance is positively but statistically insignificantly associated with ROA and ROE. Cash holdings are positively associated with both measures, although the ROE relationship varies across estimators. The ESG × Cash Holding interaction is negative but insignificant for both outcomes, indicating no significant moderation. The findings suggest that financial flexibility is independently associated with performance but do not significantly moderate ESG-related financial outcomes, highlighting the potential importance of effective financial slack deployment.