Analyzing the Impact of ESG Score on Equity Portfolio Performance: A Comparative Study of High and Low ESG Portfolios Evidence from the Largest Economy in South Asia: India

Abstract

Introduction: In today's investors are now more frequently considering environmental, social, and governance performance when making investment decisions. India is one of the largest economies in the world and ESG considerations have been implemented in India very recently. This study focuses on analyzing the effect of Environmental, Social, and Governance (ESG) scores on equity portfolio performance in the Indian stock market.

Methodology: This research utilizes a quantitative approach with data from the India National Stock Exchange's Nifty 500 index for 2019–2022. Daily stock returns and ESG scores were recorded for 174 companies according to the ESG data availability. According to ESG scores the companies set to descending order and the top 20% of companies are included in the “high ESG portfolio,” and the bottom 20% companies are included in the “low ESG portfolio”. Value-weighted and equal-weighted methods are used to compute the portfolio return.

Findings: The findings of this study show that both equal weighted and value weighted approaches, High ESG portfolio does not outperform significantly low ESG portfolios.

Conclusion: The results indicate that high ESG portfolios marginally underperform insignificantly low ESG portfolios, suggesting that investing in ESG-focused stocks may not lead to significantly higher returns or higher losses. This creates a favorable scenario for investors, allowing them to earn while incorporating sustainability and ethical considerations into their investment strategies.