Profitability Is Not a Ticket to Increase the Investments in ESG: Evidence from Indian Banks

Abstract

Environmental, social and governance (ESG) has gotten traction from all the stakeholders of firms, including banks. It is included in many decision-making processes, including financing and investment decisions. However, the relationship of ESG with the firm’s financial distress (FD) is uncertain. This article aims to investigate this uncertain situation using a panel of data from 12 years (2010–2021) from banks in India gathered to test the association between ESG and FD empirically. It is found that ESG does not impact FD. However, the interaction of ESG with banks’ profitability significantly and adversely impacts FD. Determining the association between ESG and FD when profitability moderates the association is a unique contribution, as no other study has been observed. The study’s main implication is to decouple the ESG from the bank’s profitability. The banks should not cross the limit to invest in ESG, even if they are highly profitable, to maintain their financial stability. The lack of multi-country data can be considered a study limitation, which can also be a future scope. The developing countries are expected to have a similar outcome. However, in a prospective study, comparing developing and developed economies would add further value to the topic.