The impact of environmental, social and governance score on shareholder wealth: A new dimension in investment philosophy

Abstract

Recently, there has been significant research on the environmental, social, and governance (ESG) aspects of wealth generation. Managers have tried to attract investors for sustainable growth by pushing for ESG investments. This study attempts to determine the relationship between ESG scores on shareholders' wealth and define possible selection criteria for future investments. Notably, there are funds and investment avenues that are specifically designed for ESG themes, urging toward sustainable wealth creation. However, investors' focus remains on their returns and wealth creation. In recent years, reporting ESG scores has become standard practice for most rating agencies to report the financial health of companies. Thus, this study employs a linear regression model to analyze the impact of ESG scores on the equity returns of 225 Indian companies. The results show empirical evidence of the positive impact of the governance (G) factor on equity returns, while it reports the negative impact of the environmental (E) factor on equity returns. Moreover, the impact of the social (S) factor is found to be insignificant. Therefore, we conclude that financial motivations may be needed to trigger E− and S- factor practices by companies. It is important for companies to be very conscious of their governance practices to improve their shareholders’ wealth.