Investigating the Relationship Between ESG Performance and Market Capitalization

Abstract

This study investigates the potential connection between a company's environmental, social, and governance (ESG) performance and its market capitalization within the Indian context. Utilizing a scatter plot analysis of a large dataset encompassing 693 companies, the research revealed a weak negative trend between ESG combined score and market capitalization. However, the significant dispersion of data points across the plot suggested a more complex relationship. The analysis acknowledged the limitations of scatter plots, particularly their inability to account for the influence of other factors on market valuation. Factors such as company size, financial performance, industry affiliation, and economic conditions might be playing a significant role. Additionally, the observed data dispersion hinted at potential market mispricing, where companies with strong ESG practices might be undervalued by investors, and industry-specific effects, where the impact of ESG on market value could be stronger in certain sectors. To gain a deeper understanding of this intricate relationship, future research directions were identified. These included analysing correlations between individual ESG subcomponents and market capitalization to identify specific areas with a stronger association. Segmenting the data by industry could reveal industry-specific effects. Furthermore, employing regression analysis can offer a more robust understanding of the relative influence of various factors on market valuation. Finally, a long-term perspective might be necessary to capture potential delayed effects of ESG practices on market value. By addressing these limitations and exploring these avenues, future research can contribute to a more comprehensive understanding of the interplay between ESG performance and market valuation in the Indian market.