Is the ESG Penalty Real? A Propensity Score Matching Analysis of Indian Listed Firms

Abstract

This paper investigates whether the mostly reported negative association between ESG classification and firm valuation reflects a genuine causal effect or a statistical artefact. Using Bloomberg data for 487 listed Indian firms (84 ESG-classified, 403 non-ESG) over 2005–2023, a Difference-in-Differences framework reveals a significant cross-sectional ESG penalty on Tobin’s Q (β = −0.695, p < 0.01). Similar to Difference-in-Differences framework, propensity score matching on firm size, matching each ESG firm to two non-ESG firms of comparable log market capitalisation, eliminates this penalty (β = −0.662, p > 0.10). The result holds across most performance measures (ROA, ROE, DuPont ROE) and survives lagged dependent variable controls, winsorisation, placebo tests, and dynamic event study validation. The ESG × Post2015 DID interaction is null across all specifications, confirming that India’s post-2015 regulatory shift produced no measurable differential financial effect for ESG firms. The apparent ESG penalty is a size artefact. ESG firms are larger as a group, and larger firms trade at lower Tobin’s Q for structural reasons unrelated to ESG. Cross-sectional ESG performance correlations should not be interpreted without adequate counterfactual construction.