Abstract
Over the past decade, Environmental, Social and Governance Investment or ESG Investment has become a mainstream investment approach in the investment community around the world, especially in the US and Europe. There is increasing evidence from academic and practitioner research around the world that better ESG performance by companies leads to reduction in risks, improvement in financial performance, higher stock market valuations and hence, enhanced returns for investors investing in stocks of such companies. Hence, incorporating ESG factors can lead to better informed and improved investment decisions. This has led to development of ESG indices and fonds, to enable investors to identify high ESG performing companiesfor investment purposes. Absence of convincing research on the performance of ESG investment has been one of the major factors responsible for the slow adoption of this valuable investment approach in developing economies like India. This study aims at empirically investigating the performance of ESG investment in an emerging economy - India. For the purpose, it analyses the risk-return performance of ESG India Index as compared to the conventional benchmark index, using the Capital Asset Pricing Model and the Brown-Forsythe Levene's Test. The findings distinctively reveal that even in the short time since inception, ESG India Index outperforms the conventional index and hence, ESG investing enhances investment returns, without any significant difference in risk. Thus, it provides valuable guidance to investors that they can invest in highly rated ESG stocks without paying a penalty in terms of investment returns. This paper makes valuable contribution to empirical literature on ESG investment in developing economies, specifically India. It has important implications for the regulatory agencies, governments and other international organizational initiatives which are trying to popularize ESG investment, particularly in emerging economies.
Highlights
Introduction and Significance of the studyOver the past decade, screening of investments for environmental, social and governance (ESG) factors has become a mainstream investment approach in the investment community
This paper examines the performance of ESG investment in India using ESG index data
The study provides a comparison of the performance of India's first ESG Index - the S&P ESG India Index against the benchmark CNX Nifty 50 Index to assess the impact of ESG investing on investment performance.Using daily index data from the S&P ESG India Index and S&P CNX Nifty Index in India, the paper examines (i) whether the return of the S&P ESG India Index is different from the benchmark Nifty and, whether the difference is significant statistically and (ii) whether there is significant difference in the volatility ofthe two indices under study
Summary
Introduction and Significance of the studyOver the past decade, screening of investments for environmental, social and governance (ESG) factors has become a mainstream investment approach in the investment community. In India, about Rs. 1 trillion ($ 18 billion) of capital is being invested using environmental and social screening measures annually, according to an estimate by cKinetics (cKinetics, 2013). There is increasing evidence in academic literature that ESG factors can play an important role in creating or eroding shareholder value, as corporate fmancial returns cannot be delineated from environmental arid social impact. Incorporating ESG factors can lead to better informed and improved investment decisions. This realization led to creation of new products like ESG indices and funds that offer investors the opportunity to invest in stocks of companies with high ESG ratings
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