Author(s) :

Amit Kumar Singh, Sheetal Maurya.

Volume/Issue :

Abstract :

The present study examines the historical growth rate in the ESG index and the determinants affecting the performance for the period April 2011 to December 2021. Based on the results of historical trend analysis the present study reports that there is a statistically significant and positive growth trend in the Nifty 100 ESG index over the study period. In long run, investment based on ESG parameters adds to the investor's wealth. Also, return on the ESG index and market index are highly positively correlatedand the return on the ESG index is positive during the period of high market volatility and rising fear in the market. The study reports a statistically significant negative impact of broad market valuation on ESG index return. ESG index tends to perform better during the economic and financial crisis as these are viewed as safer investments. Further, this paper emphasizes the need for a reform that gives equal weightage to all aspects of ESG in the disclosure norms with special attention to the social factors which is the most neglected factor.

No. of Downloads :

29

KEYWORDS:

Socially Responsible Investment (SRI), ESG Index, Sustainable Investing, TripleBottom-Line

INTRODUCTION & OBJECTIVES:

ESG, as it stands for environmental, social, and governance are the non-financial factors that affect investment decisions. There are several issues that are identified under the umbrella of ESG. Having been addressed and integrated effectively, these issues provide a means to manage the risk effectively and identify the growth opportunities. Recently, there has been a growing focus on ESG practices of the companies as the investors and analysts are increasingly becoming interested in such disclosure to pick the right securities for their portfolios. Security selection these days is not only focused on the traditional disclosures report in financial statements. Screening of securities requires data on ESG disclosures along with financial disclosure due to risk arising from environmental, social, and governance flaws, such as the Deepwater Horizon oil spill, Volkswagen’s breaching of environmental norms, and Facebook’s data privacy disclosure, etc. (Bhavani & Sharma, 2019). SEBI’s new proposed disclosure norm, the Business Responsibility and Sustainability Report (BRSR) is an effort in direction of making the quantifiable data available related to the environment, social, and governance disclosures. The objective is to equip the investment analyst with the required data to better select the companies which mark their performance on ESG metrics. Also, to enable individual investors to shortlist the companies based on parameters related to sustainable or Socially Responsible Investment (SRI). According to a report by PwC, 2020; ESG related disclosure information has become very crucial for investors to gauge the company risk. Historically, the major challenge for researchers and analysts has been the lack of quantitative data in the area of sustainable investing and ESG disclosures. Disclosure norms on ESG factors are comparatively more widely accepted in other countries such as CDP (Carbon Disclosure Project) or Global Reporting Initiative (GRI). BRSR can prove a promising step in direction of making the Indian ESG funds comparable with foreign funds based on sustainable investing. BRSR are disclosure norms applicable on Indian ESG mutual funds requiring these funds only to invest in companies that have Business Responsibility and Sustainability Report (BRSR) disclosures or equivalent in case of overseas securities. Unarguably, incorporating the ESG factors in investment, security selection, and portfolio and risk management is ethically and sustainably correct practice. However, some barrier remains to be there in this path. According to the latest survey report by the CFA institute, unfavorable company culture, limited understanding of ESG issues and low client demand are among the key barriers to ESG integration. On the other hand, Risk management and regulations are the prime drivers of ESG integration. This implies that asset managers do acknowledge the risk associated with poor environmental, social, and governance practices of companies. They want to factor in these risks in their investment decision. Though ESG investments are at a very nascent stage in India, it’s picking up the pace. In India, as on January 2022, there are a total of fifty ESG thematic equity funds with an average market capitalization of approximately 95 million. As per the recent data released by MSCI, the MSCI India ESG leaders index has been outperforming the MSCI India index ever since September 2007. The trend even persisted during the recent COVID-19 pandemic when the global markets were down. There is a high degree of association between the performance of the two indices, however, MSCI India ESG Leaders continue to beat the MSCI India in terms of net returns in USD (MSCI, 2021). Objective and Hypotheses Development Following are the objectives of the present paper: 1. To study the present state of ESG investment in India. 2. To analyze the historical performance of ESG index in India. 3. To identify the factors influencing the ESG index return. Consistent with the above objective of the paper following null hypotheses are tested for their significance: H01: There is no significant growth trend in return of ESG index during the sample period. H02: Market volatility has no significant impact on ESG index return. H03: Present market valuation has no significant impact on ESG index return. H04: Return on broad market index is not related to the performance of ESG index.

DOI:

10.58426/cgi.v3.i2.2021.12-27