Finding Value Through Sustainable Performance : A cross-sectional study of the relationship between risk-adjusted return and Environmental, Social and Governance performance on the Indian stock market

Abstract: Problem background and discussion: Emerging countries economies are growing substantially; one of these is India which stock market has been one of the best performing in the world in recent years. Analysts are forecasting further development and some claims that India has the most business- and investment-stimulating political leaders in the world. However, stock markets in emerging countries are highly volatile and normally more risky than in developed economies. One approach to emphasise the more common risks in emerging countries are by including Environmental, Social and Governance (ESG) rating into the fundamental investment model. However, there is a conflict of what previous studies suggest regarding ESG investments. Some argues there is a positive relation and others a negative relation between ESG factors and risk- adjusted return. Research question: “Is there a relation between risk-adjusted return and ESG performance at the Indian stock market?” Objective: The objective is to determine if there is a relationship between ESG performance and risk-adjusted return in India. Another objective is to determine if there is a relationship between ESG performance and risk-adjusted return among companies with high Total ESG rating as well as for companies with low Total ESG rating. Theoretical framework: ESG is an established approach to describe sustainability issues, where screening is a process designed to select those companies that meet ESG criteria. A basic description of Capital Asset Pricing Model CAPM, which calculates an asset's expected return, has been used to calculate risk-adjusted return. Efficient Market Hypothesis EMH is the basic theory of market efficiency and is used to explain any non-linear relationship between ESG factors and risk-adjusted returns. Adaptive Market Hypothesis AMH has been taken into account as it deals with financial behaviour. Method: A quantitative study using a deductive approach has been selected to perform this study. The practical approach is a cross sectional study where the relationship in the Indian market has been analysed and significance-tested during 2014. ESG information for 126 companies listed on the Bombay Stock Exchange (BSE) has been purchased from Sustainalytics, a global leader in research for responsible investment. Empirical findings and analysis: The results of the study demonstrate no significant relationship between Total ESG rating and risk-adjusted return during 2014. In the examination of individual categories, Environmental and Social rating does not have a significant association with the risk-adjusted Return. Though, the results display a negative relationship between Governance rating and risk-adjusted return. This relationship is also obtained among companies in with low Total ESG rating but not companies with high ESG rating. Conclusion: Results implies that investors have not been able to use the information of Total ESG performance to obtain a better risk-adjusted return on the Indian stock market in 2014. However, this can be achieved by using Governance rating.