Green finance and corporate sustainability: analysing the corruption between ESG scores and financial performance in emerging economies

Abstract

Green finance and corporate sustainability have moved from marginal topics to central items on corporate, investor, and policy agendas—especially in emerging economies where the trade-off between rapid industrialization and environmental protection is acute. Environmental, Social and Governance (ESG) scores are widely used by investors, asset managers, regulators and rating agencies as proxies for corporate sustainability, risk management, and long-term value creation. Yet, an increasing body of research and regulatory action points to a troubling phenomenon: the weak or inconsistent relationship between ESG scores and financial performance in many emerging markets, and the growing incidence of “greenwashing” or misreporting that undermines both investor trust and the efficacy of green finance channels. This paper interrogates the “corruption” (i.e., distortion, decoupling, and misuse) between ESG scores and firm financial outcomes in emerging economies, analyzing theoretical mechanisms, empirical findings up to 2024, and institutional drivers (market incentives, regulatory gaps, rating heterogeneity, and audit/verification weaknesses). We adopt a mixed-methods design. First, a systematic literature synthesis up to 2024 maps evidence on ESG-financial performance linkages, with attention to emerging markets’ heterogeneity. Second, a critical review of regulatory enforcement cases and investigative journalism illustrates the operational manifestations of greenwashing and ESG-score gaming. Third, the paper proposes an empirical framework and methodology for researchers seeking to quantify the decoupling between reported ESG scores and value creation—highlighting potential econometric pitfalls (measurement error, sample selection, endogeneity, and omitted variables). The analysis shows that while many studies (and meta-analyses) report neutral to positive ESG–financial performance relationships in advanced markets, evidence in emerging economies is mixed and often weak; some high-profile enforcement actions reveal material misstatements and greenwashing that depress investor confidence and distort capital allocation. Notably, the heterogeneity in ESG methodologies and coverage, the reliance on voluntary disclosures, and under-resourced verification infrastructure are central causes for observed decoupling (i.e., “corruption” of the ESG signal). There are multi-pronged policy and practice implications. The regulators need to enhance the levels of disclosure, third-party validation, and customized green taxonomies based on emerging market conditions. The rating providers are encouraged to make methodologies more transparent, have uncertainty bands around scores, and have the metrics being consistent with materiality per sector. Asset managers and financial institutions require greater stewardship, due diligence and proactive supervision to prevent the use of raw scores ranking. As a researcher, the paper presents a sound empirical design (difference-in-differences, instrumental variables, and sample stratification by data quality) to statistically conclude on the effects of ESG on the profitability, cost of capital and market valuation in emerging economies. In sum, advancing green finance and genuine corporate sustainability in emerging markets requires improving information quality and governance: without that, ESG scores risk becoming symbolic labels rather than reliable guides for capital allocation.