List of Abbreviations

AUM - Assets Under Management

BRR - Business Responsibility Reporting
BRSR - Business Responsibility and Sustainability Reporting
CFA - Chartered Financial Analyst
CSR - Corporate Social Responsibility
EPS - Earnings Per Share
ESG - Environment, Social and Governance
FTSE - Financial Times Stock Exchange
NIFTY - National stock exchange FIFTY
SASB - Sustainability Accounting Standards Board
SEBI - Securities Exchange Board of India
UNPRI - United Nations Principles for Responsible Investment

Definition of Variables

Economic Incentive - In the present study, ‘Economic Incentives’ imply the monetary or
extrinsic benefits received by companies as a reward for their actions. The study particularly
measures the role of Environment, Social, Governance (ESG) fund inflows experienced by the
companies as a reward or economic incentive for following and reporting their sustainable
business practices. As ESG funds are extrinsic in nature, such funds are attracted only by those
companies which have higher ESG scores or less ESG Risk which reflect their take on
sustainability. It is presumed that cash inflow in the form of funds will act as an economic
incentive for the firms to either start or continue their sustainable business practices.

ESG - ESG refers to Environment, Social and Governance. It denotes a set of requirements and
standards put forth by authorities to measure the ESG or sustainability practices of a company. It
is generally evaluated and reported by the companies as a part of legalities. However, it is widely
used by the socially conscious investors while deciding to include sustainable investments in
their portfolios. There are numerous methodologies to calculate ESG Scores of the companies.
ESG Performance- ESG Performance refers to the performance or functioning of the companies
in matters concerning Environment, Social and Governance elements in the business operations.
Their ESG ratings act as indicators of their ESG Performance wherein the entities will be
evaluated based on each of their E, S & G activities separately which is generally put together to
conclude their overall performance. The entities showcase their sustainability practices with
respect to all the three elements via their business sustainability reports.

Financial Performance - Financial performance refers to the outcome of an entity’s operations

to generate revenues out of their assets. Financial statements such as the balance sheet, income
statement and the cash inflow-outflow sheets can reflect the financial position and performance
of an entity. Moreover, there are several other financial metrics or ratios such as Price- Earnings
ratio, Return on Assets, Return on Investments,Return on Equity,Net Profit, Earnings Per Shares
which act as quantifiable indicators of financial health of an entity. This influences the investors
and asset managers in deciding their portfolios.

Asymmetric Information- Asymmetric Information refers to the lack of availability of perfect

information on the ESG initiatives and performance of the companies. The asymmetricity is
viewed from the perspectives of the investors. The lack of necessary reporting or the
incompleteness of the disclosed data can come under the purview of Asymmetric Information.
Further, it also reflects the lack of transparency.

ESG Risk Adjusted Returns - The stock returns adjusted for ESG risks are reflected in this
variable. It can be defined as the expected returns of the ESG stocks after correcting for the
potential ESG related risks. The risk-return ratio is generally computed using the Sharpe- Ratio.
 Chapter 1

Introduction

1.1 Introduction

It was only in the late 19th century that humanity enforced response protocols to counter
environmental concerns regarding protection of the wilderness, pollution and the consequences
of the Industrial Revolution. Philosophers, preservationists and environmentalists, separately and
collectively, began formulating counter measures to rectify the larger socio-environmental
deviations and protect the natural flora and fauna of the globe. Later in the 1960s, the initial
forms of an ‘environment crisis’ influenced several seminal works like Rachel Carson’s Silent
Spring (1962) and Ralph Nader’s Unsafe at Any Speed (1965) which enlightened the conscience
of the public, demanding them to “question the relationship between the government, tasked
with protecting the public interest, and industries, incentivized to act in their own economic
interests” ("Environmental Crisis" in the Late 1960s, n.d.). Later on, Population Bomb (1968)
sensitised the public on the links between exponential population growth, increased demand for
scarce resources indicating consumerism and the suboptimal as well as the misallocation of
resources. In short, the resultant negative externalities of Industrialisation have been the most
detrimental and the irreversible ones.
In order to combat environmental degradation, the General Assembly of the United
Nations summoned for an immediate call for action with the goal being the formulation of a
“Global Agenda for Change”. The World Commission on Environment and Development, also
known as the Brundtland Commission was formed to ensure global connectedness in the pursuit
of sustainable development in 1983. The agenda took the shape of Our Common Future, which
identified ‘sustainable development’ as an integral part of development (Hajian & Kashani,
2021). Sustainable Development was initially defined in 1987 as “development that meets the
needs of the present without compromising the ability of future generations to meet their own
needs” (World Commission on Environment and Development, 1987). The term originated as a
response of the Brundtland Commission against the global economies' never-ending pursuit of

2
development in isolation of the ecological degradation they caused. So, a solution to the conflict
demanded that threats to environment and development be treated as an unified issue (Asian
Development Bank, 2012) by replacing ‘economic development’ with ‘sustainable
development’.
A single stakeholder or the nation alone cannot realise the objectives of sustainable
development. Rather, all the stakeholders including the government, businesses and the people
should come together to progress along the lines of the three pillars of ‘social, economic and
environment’, as identified by the Brundtland Report, to effectuate a change for the common
good (Asian Development Bank, 2012). Followed by sustainable development, the United
Nations convened a conference on Environment and Development in 1992, also known as the
Earth Summit. Responsible investment is a pivotal component among the many strategies which
explicitly recognises the importance of environmental, social, and governance aspects to an
investment's performance and profitability as well as to the long-term health and stability of the
market. It acknowledges that the creation of long-term, sustainable returns depends on systems
that are social, environmental, and economically secure, functional, and well-governed. The
Principles of Responsible Investment states that the institutional investors are obliged to behave
in the best long-term interests of their stakeholders and also, ESG concerns are not to be seen in
isolation from the investment performance. Rather, better financial and socio-economic returns
are derived from matching investors' objectives with societal goals at large (Sustainable
Development Solutions Network, n.d.). Therefore, parallel to catering the never-ending desires
of the masses, it is imperative that investors allocate their funds wisely.
Environmental Economics suggests that it is ideal to identify the root cause of the
negative externalities of Industrialisation in order to correct them. With consumerism and
materialism as the causes; and mass overproduction being the solution to meet the increasing
demand, market players have to rethink before they channelise the economic resources towards
these supply creations. This reflects upon the need to monitor profit induced investments. As
finance is the lifeblood of the economy and accordingly, any economic activity, with a
redistribution of the funds towards sustainable means of production, the utopian notion of a
sustainable world stands a good chance for becoming a reality. In this regard, Socially
Responsible Investing has been a practice since the 1960s. However, it is in the 21st century that
ESG investing became a trend among investors.

3
 With the increasing investment in ESG Stocks, it is important to study the impact of such
stocks on the matters concerning business activities. There must be certain reasons why ESG
investing is gaining momentum. This needs to be analyzed. A possible reason is indeed the
sentiments of the investors towards investing in stocks benefiting the society and related
stakeholders or withdrawing their funds from non-ESG stocks via negative screening, thereby,
fulfilling their goals of sustainable finance. Several studies reflect an increasing demand for
non-financial information on the ESG activities while correspondingly, there is also asymmetric
information in the market regarding the ESG performance of the firms leading to
underinvestment in deserving portfolios (Myers & Majluf, 1984). With increasing legal
requirements for the companies to be transparent about their operations and functionings, there
are seemingly newer risks faced by the firms for being ESG non-compliant. ESG compliance
refers to the implementation of Environment, Social and Governance related strategies that will
benefit the stakeholders in the form of decarbonisation policies, equal pay for equal work,
increased representation of women in the board, etc. Therefore, the implementation of ESG
strategies is crucial for the companies from a legal perspective as well as economic perspective,
the significance of which the study tries to uncover.
ESG Ratings facilitate the identification of the actual risks that are otherwise unreflected
by the standard indicators of risk. This helps in reducing the idiosyncratic risks caused by the
asymmetric information. Thereby, ESG disclosure reduces the uncertainty faced by investors
during portfolio decision making. Studies point out various non-financial risks such as
reputational, regulatory, litigation and political risks which are reduced via ESG integration.
Businesses which are ESG non-compliant function at the cost of ESG Funds and are as well
posed to the threats of consumer boycotts, whistle blowers, goodwill and reputation damages
(EDHEC- Risk Climate Impact Institute, n.d.). ESG investment is a win-win situation wherein
investments increase social welfare without sacrificing profits. Considering ESG as a driving
factor in value creation, investors have started including ESG factors for effective investment
decisions. ESG investment is gainining popularity also because customers are aware and are
demanding that businesses be more transparent. If neglected, this will increase the overall risk
profile for any company as any negative impact on customer satisfaction or goodwill could affect
the financial performance drastically. However, an ESG inclusive investment decision could
reduce the portfolio risk as such businesses will face lesser business disruptions and greater

4
goodwill leading to better financial performance in the long run. Ultimately, this poses lesser
downside risks for the shareholders. Therefore, the ESG investment seems to add more value to
the investment besides the monetary value that is being increased by being ESG inclusive while
investing (Jain & ET Contributors, 2022).
Besides the legalities, the study attaches an economic perspective to the need for the ESG
Disclosure of the companies because ESG Funds do carry, implicitly, an offer of capital at lesser
costs (Mulchandani et al., 2022), reduce asymmetric information and thereby, increase
transparency leading to a reduction in the downside (Fernández et al., 2019) and the idiosyncratic
risks (Horn, 2023). Moreover, ESG performance and Financial Performance ideally showcases a
positive relationship which makes such funds more attractive to both the ESG investors and the
shareholders as it benefits both the parties economically. These are the arguments of the study
for why ESG funds could act as an economic incentive for businesses to follow sustainable
business practices.

1.2 Statement of the Problem

The present study is centered around the role of ESG Funds in acting as an economic incentive
for the businesses to follow sustainable business practices. There are innumerable studies
analysing the association between ESG and financial performance. However, the existing
literature falls short of studies on the role of ESG funds as an incentive to business firms, let
alone its role as an economic incentive to follow sustainability. This argument of ESG funds
being an economic incentive has been empirically studied by realizing three key objectives.
ESG Funding involves investors preferring to invest in companies with higher ESG scores and
negative screening of their portfolios. Consequently, those companies which perform badly at the
ESG metrics have a relatively lesser chance at attracting ESG funds. It is proven that ESG rating
influences ESG fund inflows. Therefore, there are high chances of ESG Rating information
being a significant determinant of ESG investment (Benson & Humphrey, 2008; Białkowski &
Starks, 2016; Hartzmark & Sussman, 2019; Latino et al., 2021, ) . In this case, ESG disclosure
becomes crucial to any company, thereby, incentivising them to disclose their ESG activities.
Nevertheless, the paper does not rule out the fact that any rational entrepreneur would prioritize
the financial performance and profitability of the firms over anything that has disputable claims

5
of enhancing the financial metrics. Therefore, the study also incorporates the analysis of an
association between the ESG and the financial performance to see if ESG performance
incentivises the firms economically by enhancing their financial metrics. Correspondingly, the
improved financial returns is also an incentive for the investors, particularly, institutional
investors to incorporate ESG in their portfolio decision making. Additionally, the study also
derives a functional relationship between ESG Investment Supply Function and Asymmetric
Information and ESG- Risk Adjusted Returns which subsequently reflects the weightage of ESG
integration in Investment portfolios, thereby, luring the companies to be ESG Compliant in
return for ESG investments which is also capital at lesser costs.

Fig 1.1: Flowchart indicating ESG Funds as an economic incentive

ESG Rating / ESG

Performance Funds

Financial Performance Economic

Incentive
Source: Researcher generated

Figure 1.1 is the representation of ESG Funds as an economic incentive for businesses to be ESG
Compliant. It has been empirically proven that if the companies are ESG- rated or showcase ESG
performance, they automatically attract ESG Funds at lower costs of capital. Therefore, it acts as
an economic incentive for the firms to be ESG Compliant. Parallely, it would not be beneficial
for the companies to be ESG- Compliant if ESG-Compliance does not guarantee them a better
financial position or affects them adversely. Hence, the proof of enhanced financial performance
or a positive relationship between ESG and financial performance could incentivise the firms to
integrate ESG in their function. The role of ESG has been analysed through the analysis of three
broad objectives.

6
1.3 Objectives of the study

● To examine the correlation between ESG performance and Financial performance

globally.
● To analyse the degree of relationship between ESG performance and Financial
Performance in Indian companies during 2022.
● To establish ESG Investment Supply as functionally related to two key determinants such
as Asymmetric Information and ESG Risk adjusted Returns, given that profit is the prime
determinant of ESG fund supply.

1.4 Research Methodology

The methodology of this study can be divided into four sections covering the variables under
study, sources of data, techniques used and the analysis. The research methodologies applied are
based on the objectives of the study and the nature of available data. Hence, descriptive statistics,
correlation and hypothesis testing with t-test are the analytical methods applied across the study.
Moreover, the paper applies a triangulation method of research for fulfilling the objectives.
The current research is mainly developed on meta analysis, meeting the three key
objectives. The first objective concerning the causal relationship between ESG Performance and
Financial Performance at the global level is based on a meta-analysis entitled “ESG and
Financial Performance : Uncovering the relationship by aggregating evidence from 1,000 plus
studies published between 2015-2020” (Whelan et al., 2021) and the second objective of
defining an ESG Investment function is grounded on the paper entitled “Responsible Investing:
The Efficient ESG Frontier” (Pederson et al., 2021).
A meta-analysis is a statistical analysis of a set of independent or unique studies on the
same research question, seeking to derive an overall trend or conclusion in the behaviour of the
variables concerned. (Whelan et al., 2021) collated 1141 primary peer-reviewed studies and
around 27 meta-reviews ranging from 2015 to 2020 in order examine the association between
ESG and Financial performance with a goal to observe the differences in the studies’ conclusions
in a scientific and systematic manner. The present study uses meta-analyses as (Hang et al.,

7
2019) notes that the empirical evidence from primary studies is largely fragmented and
inconsistent.
The paper applied Preferred Reporting Items for Systematic Reviews and Meta-Analyses
(PRISMA) guidelines to filter the studies. Over 29 percent of the studies represent a global
sample whereas 33 percent belong to the United States of America and 25 percent to Europe.
They screened approximately 3000 articles and papers and reviewed 1141 studies after which the
different characteristics of each of the individual studies were coded for deriving the conclusions.
The screening process involved four stages starting from identification followed by two levels of
screening and the final stage, inclusion of the selected samples. Further, the studies were
classified into three as corporate studies, investor studies and thematic studies.

1.4.1 Variables Used

Table: 1.1 Variables and Sources of Data

S.No. Variable Indicator/ Symbol Source of Data

Used

First Objective

1 Environment Social ESG CRISIL ESG Scorecard 2022

Governance

Second Objective

2 Screener -Stock Analysis &

Financial Performance Earnings Per Share - Screening Tool and The Economic
EPS Times, Markets. (March 2023)

Third Objective

3 Asymmetric ESG Disclosure Score Literature Review

Information (proxy)

4 ESG- Risk Adjusted Sharpe ratio Literature Review

Returns
Source: Computed by the researcher from secondary data

8
The variables are identified based on the objectives of the study. Given that there are three main
objectives, the following variables have been identified by the researcher.
1. ESG Performance - ESG performance of the Indian companies is measured by the
CRISIL ESG Scorecard 2022.
2. Financial Performance - Earnings Per Share of the companies in March 2023 is the
indicator of the financial performance.
3. Asymmetric Information - The lack of availability of perfect information (disclosure) on
the ESG performance of the stocks from the perspectives of the investors is proxied by
ESG Disclosure Score.
4. ESG Risk Adjusted Returns - The returns of the ESG incorporated stocks after adjusting
for ESG risks is proxied by Sharpe Ratio.

1.4.2 Sources of Data

The present study is based on secondary data which is gathered from credible sources such as
CRISIL Ratings Limited, New York University, Stern & Rockefeller Asset Management,
Screener -Stock Analysis & Screening Tool, The Economic Times-Markets. Additionally,
newspaper articles, official reports by International Organisations and Conference and Interview
reports provide crucial information for the present research. The collected secondary data have
been filtered, categorized, tabulated and analysed using various statistical methods. The study
benefits from the use of secondary data as it saves time and duplication of effort. The data
analysis has been conducted using various quantitative techniques such as Correlation, Two-
tailed t-tests and Hypothesis Testing supplemented by critical analysis of the existing literature.
Furthermore, the sources vary according to the objectives of the study.
1. To examine the correlation between ESG performance and Financial performance
globally.
○ New York University & Rockefeller Asset Management - A meta-analysis of
1000 plus studies published from 2015- 2020.
2. To analyse the degree of relationship between ESG performance and Financial
Performance in Indian companies during 2022.
○ ESG Scorecard 2022 published by CRISIL Ratings Limited

9
 ○ EPS Rates recorded by Screener -Stock Analysis & Screening Tool and The
Economic Times, Markets.
3. To define ESG Investment Supply as functionally related to two key determinants such as
Asymmetric Information and ESG Risk Adjusted Returns, given that profit is the prime
determinant of ESG Fund Supply.
○ Various existing articles and papers.

1.5 Scope of the study

The present study focuses on three broad objectives which prove relevant in the current scenario
of rapidly increasing interest towards ESG funds. The study conducts a comprehensive analysis
of ESG’s influence on the Financial Performance both internationally and domestically in order
to establish the role played by ESG Funds as an economic incentive for sustainable business
practices. Although there are studies analysing the need for economic incentives for ESG
investments from the investor perspective, there are less studies focusing on the role of ESG
investments as Economic Incentives for the companies from a corporate perspective. The meta-
meta- analysis of existing literature collated from across the globe gives a multi-dimensional
perspective on the research problem and helps in deducing the surface level understanding of the
association between the variables concerned. Furthermore, the meta-analysis is of unique and
independent studies published from 2015 to 2020 making it relevant for linking the recent past
and the current status. It is believed that the study will be able to derive the current status of the
relationship between the variables via the secondary objective of empirically testing for the
relationship between ESG Performance and Financial Performance, particularly, in the Indian
context. Furthermore, it tries to establish a simple functional relationship with the dependent
variable, ESG Investment Supply and the independent variables, Asymmetric Information and
ESG Risk Adjusted Returns. Since, this function is partially based on an existing theory of ESG
Efficient Frontier, it is believed to be relevant and prove useful to understand the significance of
perfect information and ESG Integration in the operational activities of a company and its
financial metrics, internalizing ESG Risk in the returns.

10
1.6 Limitations of the study

The present study is not free of challenges. The research is bound to certain limitations as
reflected upon below:

➔ The study’s population being institutional investors, it is challenging to gather ample

primary data from investors representing either international AUM or Indian AUM.
Therefore, the study is entirely based on secondary data. Hence, faces the limitations of
secondary data such as the availability, accuracy, reliability and validity.
➔ The lack of standardization of ESG Methodology makes it difficult to generalise the
study as the methodology varies from country to country and even between third party
rating agencies.
➔ The lack of standard definitions of various ESG related terminologies and
interchangeability of the same increases the chances of misunderstanding and
misinterpretation of the concepts in the existing literature on ESG.
➔ EPS as a financial indicator may not always reflect the actual financial performance of a
company. Also, it is bound to market fluctuations and is very volatile as the stock market
elements tend to fluctuate rapidly. Therefore, deeming the results less significant to base
the relationship between ESG Performance and Financial Performance on the value of
EPS in future time periods.
➔ The investment function is only theoretical in nature and not empirically tested. It is only
a simple theoretical model with two independent variables while there are numerous
other independent variables which are not considered in the function. Therefore, the
assumption of ceteris paribus neglects the influence of the other determinants.

1.7 Scheme of the Study

The research has been structured into different chapters covering different phases of the research.
There are five broad chapters starting from the introduction to the conclusion. The structure can
be elaborated upon as below:

11
● Chapter 1- Introduction
Introduction outlines a general overview of the research area being studied, the research
gap, objectives, research methodology, significance, limitations and the chapter
classification of the paper.
● Chapter 2- Review of Literature and Theoretical Framework
Review of literature analyses the existing literature in the field of ESG concerning ESG
and financial performance, ESG risks, ESG integration and other related studies to
deduce the knowledge gap in the existing literature. Further, the important theories
related to ESG investments and other seminal works which add value to the study have
been analysed.
● Chapter 3- Background of the Study
The background of the study throws light on the evolution of ESG, ESG in the global and
Indian scenario along with its current trend. The analysis of Indian companies which is
based on the CRISIL ESG Index has been elaborated upon in this section.
● Chapter 4- Data Analysis
The selected data and literature has been visually presented, empirically tested and
analysed in this section using various statistical tools such as correlation, two-tailed t-
tests and hypothesis testing.
● Chapter 5- Findings, Suggestions and Conclusion
The observations and findings of the data analysis have been summarized in this chapter.
Along with the findings, a few suggestions which the current study puts forth are also
detailed. Finally, the study concludes by stating if the main objective of the study has
been realized.

12
 Chapter 2

Review of Literature and Theoretical Framework

2.1 Review of Literature

The present paper is grounded on the observations made from an extensive literature review.
This section presents the findings of various selected articles which are broadly classified into
ESG and Financial Performance,ESG Integration and Asymmetric Information, ESG and Risks
and other literature from reports, articles and conferences according to the variables of the
present study.

2.1.1 ESG and Financial Performance

Santi G. Maji and Prachi Lohia (2023) statistically analysed the relationship between ESG
Performance and Financial Performance of 222 Indian companies ranked by CRISIL Rating
Limited in a cross-section study. With the application of Ordinary Least Squares and
Simultaneous Quantile Regression on CRISIL’s ESG Scores and market and accounting based
measures of financial performance from ACE Equity Database, they also studied the impact of
ESG Performance at various locations of the distribution of firm performance. They observed
findings which baced the stakeholder theory. It was inferred that the Indian firms base their
activities more on the social and governance parameters rather than the environment parameter.
Moreover, they found a positive association between the performance in ESG and its
components and that of the firm’s while in particular, the manufacturing firm witnessed greater
impact than the service sector firms. The quantile regression supported the Resource based view
theory and inferred that the influence of ESG varies as the location of the conditional distribution
of firm performance varies. Further, the impact is evident at upper quantiles. Additionally, the
study provided policy implications that it was imperative that firms should also focus on the
environmental element of ESG; that financial performance can be improved with more
disclosure and it’s a pathway to sharing the businesses’ sustainability practices to the

13
stakeholders. Finally, the study suggests the firms should report beyond the scopes of the
Business Responsibility and Sustainability Reporting put forth by SEBI.

Ulrich Atz et. al. (2023) surveyed the relationship between ESG Performance and financial
performance via 1141 peer-reviewed primary studies along with 27 meta-reviews which is based
on another set of approximately 1400 studies which were published between 2015 and 2020. The
meta-analysis concludes the performance of ESG funds and the conventional funds to be
indistinguishable. These findings are in contrast to the existing literature on ESG Performance
and Financial performance reflecting mostly positive associations. The authors put forth three
propositions,which are; ESG integration strategy performs better while compared against
divestment or screening strategies, ESG investing caters to and provides other obvious benefits
which was highly noticed during any economic or social crises and finally, specific strategies
such as decarbonization has the potential to incorporate premium for climate risk.

Ganeev Chadha (2022) explores the concept and the growing trends of Environmental, Social
and Governance, particularly in India. The article adds value to the research by linking economic
agents’ sustainability practices with their growth potential and opportunities. Further, the
evaluation of the top 10 ESG Indian companies facilitates an empirical base to the study. The
article is based on the data from Futurescape, a platform using an analytical measure called
“Spread”. The companies under the study are scattered across different sectors and industries. It
is observed that the empirical findings are indicative of a positive influence of Environment
parameters in improving the scores and rankings of the sample companies. The study utilised the
financial statements of the companies in order to also observe the financial performance of these
top 10 ESG rated companies. It is concluded that both customers as well as the investors value
both financial as well as sustainable practices of companies while making economic decisions
such as consumption and investment.

Ulrich Atz et al., (2021) applies a five-step methodology to value the return on sustainable
investments. The methodology systematically tries to monetize the sustainable practices in order
to find out if they lead to positive financial returns. This has been carried out with the help of
mediating factors representing the potential and realized benefits that are financial in nature.

14
They have based their study in two industries namely, a deforestation -free beef supply chain in
Brazil and a sustainable automotive industry. Substantial value addition was found in those
industries after the implementation of sustainable business practices. The study concluded that
the potential Net present value in both the cases showcased favourable results. Thus, this
methodology was proven to be useful for company managers to monetize their sustainability
strategies and have a competitive advantage in the market by creating shareholder value.

Markus Hang et al. (2019) identified the lack of studies concerning the causal relationship
between Corporate environmental and financial performance. Further, there is heterogeneity and
mixed results in the studies conducted so far in the academic space. Hence, they conduct a meta-
analysis of existing empirical studies, collecting 893 empirical estimates out of 142 Corporate
environmental performance -Corporate financial performance studies. The analysis concludes
that financial resources can improve a firm’s environmental performance in the short run,
supporting the slack resources hypothesis. However, these effects are not observed in the long
run, ie, after one year. In the opposite direction, the improvement in the environmental activities
reflects no short-run impact on their financial performance. Rather, it is in the long run that the
firm benefits substantially, as supported by Porter Hypothesis. This leads to the conclusion that
the causality of relationship between the two variables depends on the time period.

Guido Giese et al. (2019) explores the link between ESG information and the performance &
valuation of the companies, by analysing different channels of transmission. The study proves to
be significant as, although there are several studies based on the relationship between the
variables under lens, they lack enough evidence to establish the behaviour of the parameters. The
study is carried out in a standard discounted cash flow model. The three transmission channels
are, namely, the cash-flow channel, the valuation channel and the idiosyncratic risk channel.
Employing the Morgan Stanley Capital International ESG Ratings data and other variables which
are financial in nature, the authors tested the channels individually. The results reflected that a
company’s ESG information acts as a financial indicator as the ESG information was
disseminated to both the performance as well as the valuation of the company via different
channels; the systematic risk profile and the idiosyncratic risk profile. Moreover, the study

15
proves that ESG integration is yet another possibility wherein the ESG ratings which are
reflective of the entities’ financial performance can be incorporated into the financial analyses.

Pablo Durán-Santomil et al. (2019) examined the statistical relationship between the ESG scores
of European Equity Funds and their financial performance. They analysed the effects of Socially
Responsible Investments in such funds by studying its degree of relationship with the
Morningstar Sustainability scores for 2016, 2017, and 2018. The conclusions drawn out of it
reflected upon significant positive correlations between the variables. This implicitly implies that
mutual funds invested based on the ESG scores can prove to generate better risk-adjusted
returns. However, the same inference cannot be applied in case of non risk-adjusted returns.
Further, they put to test the degree of association between mutual fund flows and risks. It was
concluded that higher- rated funds attract funds while the degree of sustainability is inversely
related to the Value at Risk of the fund. This inference substantiates that higher-rated funds cover
the risk of extreme losses.

Karishma K Dalal and Nimit Thaker (2019) reflects upon the increasing role of ESG
considerations while making sustainable or responsible investment strategies to improve the risk
management and also keeping decent yield for the investors in mind. The authors examine the
impact of ESG on the performance of Public sector companies in India. Return on Assets and
Tobin’s Q ratio are the indicators of profitability and value of the firms. Data on ESG concerning
65 Indian firms were gathered from NSE 100 ESG Index database for two years ranging from
2015 to 2017 which was analysed with panel data regression analysis. It was concluded that
financial performance was enhanced by a decent ESG performance of the corporates. It was also
substantiated by evaluating the relationship through accounting and market based methods. The
scope of the study extends to participants ranging from corporates and investors to regulators and
policy makers. The paper encourages sustainability reporting inclusive of ESG disclosures as it is
proven to enhance the sustainability and long term improvement of the value of the shareholders’
wealth.

Witold Henisz et al. (2019) discussed five important ways in which a right proposition of
Environmental, Social, Governance elements create value to corporations. They point out that

16
sustainable investing which is oriented at ESG has witnessed a tremendous growth as the Global
Sustainable Investment geared up by sixty- eight percent since 2014 and is at 30 trillion dollars
which is tenfold the level in 2004. This growth has been attributed to the heightened concerns of
the society and government on the impact of the corporations alongwith the beliefs of the
investors that a good ESG performance ensures long term benefits. The McKinsey Analysis also
supports the fact that a strong ESG proposition is correlated with higher equity returns. Further,
the researchers listed down five crucial ways in which ESG is linked to cash flows, such as, Top-
line Growth, Cost Reductions, Reduced Regulatory and Legal Interventions, Employee
Productivity Uplift, Investment and Asset Optimisation. However, they concluded that being
thoughtful about ESG might attract some short-term disadvantages to the companies whilst it
creates a long term value enhancement.

Gunnar Friede et al. (2015) conducted a meta analysis of about 2200 independent empirical
studies aggregating evidence on the ESG and financial performance of companies across the
globe. The study tries to gather all the existing literature on the subject matter so as to integrate
all the fragmented results from primary as well as secondary studies since the 1970s and make
generalizations. The authors induced from the studies that approximately 90 percent of the
studies have proven to show a nonnegative correlation between ESG and Corporate Financial
Performance. Interestingly, a large majority of those are reporting positive relationships,
indicating a stable trend in the relationship. Further, they have classified the studies on the basis
of the nature of regions, asset classes and as portfolio and nonportfolio.

2.1.2 ESG Integration and Asymmetric Information

Soohun Kim and Aaron Yoon (2023) explored the actions and performance of the signatories,
especially active U.S. Mutual funds of United Nations Principles for Responsible Investment
(PRI) in order to observe if they implement ESG in reality. The study observes that PRI
signatories attract ESG Fund inflow at a large scale. However, such funds fail to perform up to
the standards to implement ESG in their firm’s operations which is evident from their ESG
Scores or returns on the funds. This is evident from the observations made by incorporating
proxies for ESG integration in the firm’s activities. It was inferred that they failed to observe any

17
follow through. While studying the cross-sectional funds, only quant funds exhibited at least
minor improvements in the ESG performance while compared against others. Contradictorily, it
was noted that although they are not getting better at ESG incorporation, the companies engage
in greenwashing by promoting themselves to be sustainable firms across various media.

Sivananth Ramachandran & Mohan K. Prabhu, (2022) observed that ESG investment trend is on
a rise at the global level as it is expected to surpass fifty-three trillion dollars by 2025. The article
identifies the three major reasons for the hike in the ESG funds as high investor demand,
improving regulatory criterion and the introduction of ESG funds, particularly the Indian
Investment Management industry which launched nine ESG funds recently. However, at an
infant phase of emerging ESG funds, the objective is to identify how ESG issues are integrated
in the investment decisions. The article is based on a study conducted by CFA Institute on Indian
ESG funds suggesting that such integration approaches are in a relatively infant stage. Not to
mention the variety of approaches towards ESG grading methodology and the resultant
outcomes. One of the main reasons delaying an exponential rise in the ESG funds is the
variability involved in the reporting or rating methodologies. Although the study does not find a
serious involvement of pension funds in ESG investing in India as opposed to their presence
globally, the Global survey of retail and institutional investors by CFA Institute puts forth
credible data on the take of retail and institutional investors. The survey sampled 200 retail and
75 institutional investors. The findings are aligned mostly with the higher risk-adjusted returns as
the pushing factor in ESG funds than the other societal or personal values that ESG funds create.

Shariq Khan & ET Online (2022) reported the results of an inaugural survey of eight hundred
Small and Medium- sized Enterprises (SMEs) across six Asian markets conducted by
Bloomberg, Media Studios and Development Bank of Singapore. It is observed that Indian
SMEs among the Asian counterparts rated ESG with high priority while doing business. The
survey analysed the attitude of the SMEs towards ESG in which it was found that Indian SMEs
consider ESG as a stepping stone to gaining customer’s attraction and ultimately, improving the
company’s reputation and goodwill. It can be understood that the global value and supply chain,
customers and the government schemes and other financial incentives act as critical factors in
driving ESG . Additionally, the survey also delved into the aspects challenging the companies on

18
their path to ESG compliance. The challenges observed are associated with the uncertainty in
evaluating the Return on Investment of ESG investments, cost of deployment of such practices,
the lack of information on the assessment of ESG projects, implementation, funding,etc.

Sustainability Accounting Standards Board, (2018) explored the obstacles and opportunities in
disclosures and integration of the ESG data in their report of an event which was a mix of
moderated and structured conversation and discussions on overcoming the challenges and
unlocking the potential of ESG data. The structured discussions were between various
Investment Professionals, Sustainability Professional, Consultants, Academicians and Market
Participants from reputed institutions. The report focuses on the key areas of concern namely, the
lack of standardization in ESG reporting, the Cobra effect ie.,the unintended consequences
caused by the absence of a proper and iterative process of determining the correct metrics and
incentives, the technical shortcomings in ESG reporting, ESG as a key to identify and manage
intangible risks, etc. SASB reports that ESG reporting was both favourable and unfavourable to
all the stakeholders of a company in certain ways. While ESG reporting aids the long-term
investors in choosing wisely those equities which lead to value creation, it pressurizes the asset
owners and managers to dump ESG data pertaining to their companies from a variety of sources
resulting in confused and overwhelmed investors. The report argues that investors are not a
monolith and therefore, the data related needs of the investors are unique. Further, while one
participant stated that ESG information is subject to suspicion with regard to their consistency
and quality forcing them to base their investment strategies on company disclosures rather than
ESG Data, there are other representations favouring the importance of ESG data in value
creation.

Dimitris Melas et al. (2017) observed that ESG considerations have been on a rise in the past
decade as they are being incorporated into mainstream management of portfolios. The United
Nations Principles for Responsible Investment has been witnessing numerous long-standing
institutional signatories such as insurance companies, pension funds, sovereign wealth funds and
other foundations. Such institutions are selective while investing as they are observed to allocate
funds to companies incorporating ESG mandates in their portfolios. This observation has been
made from the perspective of the Asset managers as they witnessed and cater to high demand for

19
ESG integration by the asset owners. ESG Integration is carried out by deploying strategies
starting from screening to full integration; delving further into security selection and portfolio
creation procedures.

Stewart C. Myers and Nicholas S. Majluf (1984) explores the needs of a company to issue
common stock in order to raise money for a worthwhile investment opportunity. It is considered
that management is more knowledgeable than potential investors about the firm's value. Further,
investors behave logically and rationally while interpreting the firm's behaviour. These
assumptions are used to create an equilibrium model of the issue-invest choice decisions. The
model illustrates how businesses could decline to issue stock, which could result in missed
opportunities for valuable and profitable investments. Additionally, it offers explanations for a
number of features of corporate financing behaviour, such as the preference upon internal
sources of funding and the preference on debt over equities while sourcing finance externally.

2.1.3 ESG and Risks

Matthias Horn (2023) analyses if ESG stocks influence lower idiosyncratic risks. The study is
based on the observations of US stocks ranging from 1991 to 2018 while controlling for stock’s
exposure to various factors influencing the stock and risk. The study finds out that ESG rating
alone has the potential to reduce the idiosyncratic risk. Those firms with ESG rating, regardless
of their scores are considered to be transparent and reduce the future uncertainties regarding
stock risk-return volatility and therefore, pose less idiosyncratic risks. This means that even
weaker ESG performers tend to benefit from merely reporting their ESG initiatives compared to
the non-ESG rated companies. Likewise, the stocks with negative screening tend to attract
investor preferences as opposed to the ones without negative screening. The paper uses ESG
score as an indicator of the ESG Risk. Further, the paper suggests the firms in developing
countries should strive for ESG Ratings and this applies to even those firms with low ESG
performance. However, it does not necessarily mean that the existing portfolios should be
reallocated rather it might be worthy to consider these while adopting a new portfolio.

20
Ayesha Faridi (2022) in her interview with Mark Mobius, founder, Mobius Ventures, discusses
ESG as a determining factor in investment decisions. In the discussion, although Mr. Mobius
opines that their investment decisions center around the returns on capital, equity and debt and
the EPS growth, what they refer to as ESG Plus C ie. ESG plus Culture, holds a greater
significance. Because the numerical parameters including the performance of companies in all
the three elements of E,S and G have helped them reduce the risks related to investing.
Additionally, Mr. Mobius gives greater importance to the Culture within a company as it is the
life of an entity. They believe that ESG plus C is the best way to reduce business investment
related risks.

N. C. Ashwin Kumar et al. (2016) developed a new quantitative model, establishing the
relationship between ESG factors and Risk-adjusted performance. The paper conducts a
comparative study between the risk-return volatility of the ESG and non-ESG companies listed
and unlisted in Dow Jones Sustainability Index in 12 different industries. Through their Risk-
Premium model, they developed a mathematical model to evaluate the correlation between ESG
performance and stock return volatility. The analysis concludes that ESG companies experience
stock performance volatility lower than the non- ESG counterparts by 28.67 percent indicating
higher risk premium for the latter. Further, it was observed that the ESG performance and its
influence on the companies in reducing the risk varies according to the industries.Further, they
opposed the general notion of lower risks- lower returns as lower volatile stocks generated equal
or higher returns. The risk-return ratio was measured by both Sharpe- Ratio as well as Treynor
ratio wherein both of them indicated the same trend of lower risks being related to higher returns.

EDHEC- Risk Climate Impact Institute, (n.d.) explores whether ESG investments influence
improvements in risk-adjusted returns. The article extensively explains about the existing
theoretical framework in ESG and a broad literature review in which they consider papers both
favouring and against the claims of ESG increasing returns or financial performance of ESG
stocks. Besides the theoretical background, the article also puts forth the empirical evidence to
substantiate the link between ESG performance and risk-adjusted returns. It can so happen that
higher ESG concerns lead to lesser diversification of the portfolio leading to higher risks.
However, there are numerous studies dated since the early 2000s which reflect pro-ESG results

21
supporting the claims of ESG influencing greater returns even though they are proven to be less
risky. Further, the article talks about the interaction between ESG momentum and ESG scores.
The article concludes that ESG should be integrated for its unique benefits offered to the
environment and society rather than the forever disputed claims and allegations of improved
financial performances.

2.2.4 Other Literature

ET Bureau (2022) reported the views of various executives of Godrej Industries, EMEIA
Managing Partner, Tata Chemicals,Grasim Industries, HDFC Asset Management Company and
EY India. It can be analysed that most of the executives observe a rapid transition towards
favouring the ESG norms and regulations. Compliance towards EU regulations has increased,
apparently, to gain more market share. As observed from the views of Mr. Nadir Godrej, other
experts have also agreed that more than compliance, ESG gains are realised in the long run, ie.
benefitting the firms in the future. Given that, this rapid transition and the long run impacts are
unanimously attributed to the behaviour of the stakeholders and the change being driven by the
regulatory and financial bodies concerning the businesses and ultimately, by the choices of the
customers who comprise the community. Therefore, the focus and actions of the companies
should be community-centric if they are to effect any changes. Moreover, there is a sector-
specific importance given to the ESG Compliance. Hence, their whole purpose of business is
being shifted beyond profits leading to ESG bringing about a paradigm shift in the practice of
doing business rather than a mere compliance mechanism. Therefore, the ESG fever is believed
to continue as long as regulations, capital markets make it an inevitable factor.

Shivani Bazaz & ET Online (2022) covered the Morningstar Investment Conference 2022 and
referenced the ideas of two representatives of HDFC and UTI Mutual funds. According to the
report, ESG Funds have been gaining momentum in the Indian Markets. Although the growth in
AUM schemes are not high, the market is on the right path. Likewise, ESG is recognised as a
significant part of sound investment. The corporates reporting the Business Responsibility and
Sustainability Reporting have been on a hike as they have started realising the long run impact of
ESG, investment in which is inevitable if the objective of the company is to sustain. It is also

22
observed that a positive outlook towards ESG increases the beta of the market, leading to better
returns for all the market participants. Further, there has also been discussion on the exclusionary
nature of ESG wherein some sectors, for say, arms and ammunition, are ignored. A broader
perspective helps one include such sectors which are ESG Positive because these actions will
make the investment lot bigger.

Deepak N.G., (2022) points out that the third age of enterprise is defined by purpose. The new
epoch in this century of industrialization is about how a brand behaves with the larger
community. This shift from the product and how it is made to the purpose of the entities is so
compelling that India is no exception because across the world, even the employees and
consumers have started thinking differently. Based on a research by LinkedIn, employees under
35 prioritise corporate purpose; 40% prefer to work in an enterprise with a stated purpose and
81% consumers are willing to pay more for eco-friendly products. Further, the author quotes the
chairman of HDFC, “ESG and purpose-driven strategy is (now) an expectation by all investors
today. This entails a range of issues from diversity, inclusion, climate risk, emissions, supply
chains, labour rights, anti-corruption..”.

CRISIL (2022) analyzed and rated around 601 companies across 53 sectors on ESG factors in
their Sustainability Yearbook. It states that the disclosures are improving, however, there’s a
long way to go. They observed that climate risk is not being factored in the compliance. After
they came up with the first ESG scores on Indian companies in 2021, the numbers persuaded
companies to perform better in relation to their peers’. This has also been evident in the 2022
yearbook as the quality and quantity of disclosures have improved. Further, they state that even
though the government has taken an initiative to implement a policy, a lot more has to be done in
order to create a favourable environment for ESG investing in India.

Nirbhay Lumde (2022) studied the scope of ESG, the growing sustainability reporting landscape
in India and reviewed various other reports by credible agencies such as Bloomberg and PwC.
They defined ESG as a triple-bottom-line approach that combines financial gains adhering to
social and environmental norms. They drew a trajectory of reporting compliances for companies
in India and stated that the reporting landscape in India has come a long way from the

23
introduction of the Business Responsibility Reporting. Moreover, BRSR is considered as a
standardized reporting format that will give a baseline to compare environmental, social and
governance goals across companies and sectors. It is essential to understand the value of the
introduction of BRSR as it embraces and incorporates metrics of international frameworks on par
with global ESG reporting trends.

The literature review on the different variables under study facilitates a comprehensive
understanding of the interdependence and interdisciplinary nature of the research problem. It is
evident that there exists innumerable literature on ESG integration, financial performance and
risks. Majority of the studies favour ESG integration and its disputed claims of improved
financial returns. However, the studies on sustainable investment and sustainability practices are
mostly generalized with conclusions made from proxies such as CSR for ESG practices due to
the interchangeable usage of terminologies. Therefore, the conclusions of such studies will only
reflect a uni-dimensional aspect of ESG. The interchangeability combined with lack of
standardized ESG methodologies render it challenging to compare the financial performances of
the companies. Further, there are a negligible number of studies focusing on the economic
perspective of ESG comprehensively. Studies on the financial performance of Indian ESG stocks
are meager as well. It is also evident that studies fall short in analysing the determinants of ESG
Funds Supply. Therefore, a knowledge gap has been identified in the existing literature on the
factors influencing ESG investment, the performance of ESG funds in India and a
comprehensive literature on the relationship between ESG and financial performance globally.

2.2 Theoretical Framework

2.2.1 Basic Theories

The theoretical framework of a study substantiates the research with adequate theory and
supports the research problem under consideration. Moreover, it helps in identifying how the
present study fits into the existing literature.
ESG requires that business firms be considerate of the interests of all its stakeholders and
wellwishers. Aligned with the Stakeholder theory, the companies are obliged to act socially

24
responsible and be considerate of the needs and its stakeholders like employees, customers,
society, etc. This helps the companies to be sustainable in the long run and leads to improved
resilience of the companies, better stakeholder engagement and improved trust. The better the
stakeholder management and transparency about the companies’ operations, the lesser the gap
between the stakeholders and the companies that might occur as understood from the Agency
theory. Agency theory reflects upon how the directors and managers act in order to maximise the
shareholder’s wealth. Further, the implementation of the ESG strategies is understood through
the framework of Institutional Theory. Because the operations of the companies are always
influenced by certain driving factors such as the regulations, legislations , etc. Stakeholders are
believed to be interested in those companies with high goodwill and reputation as against those
with lack of legal compliances. Moreover, the theory helps investors in making rational portfolio
investment decisions. Additionally, Social Capital theory reflects upon the role of ESG in
enhancing the social relationships within the organisations and thereby, strengthening the trust
and encouraging a sense of shared value. Consequently, this is believed to increase both financial
and non-financial performances of the companies. Further, the theory helps in the identification
of key stakeholders who influence the ESG practices of the companies and thereby, benefitting
from it. Finally, the Legitimacy theory says that the companies benefit from the stakeholders if
they are seen as legitimate enough by the stakeholders. The theory helps organisations in
identifying the ways to gain and sustain legitimacy with regard to the ESG initiatives and
impacts (Kudryashov, 2023).

2.2.2 ESG and Financial Performance: A Meta-Analysis

Tensie Whelan et al. (2021) develops the meta-analysis by sorting and categorizing the existing
literature into Corporate, Investor and Thematic studies. ‘Corporate studies’ refer to those papers
which focus on the financial performance from the perspective of the corporations or the
managers. The samples for corporate studies were generally based on public companies which
were analysed with any commercial ESG Score or parameter including innovations, risk
management and efficiency at the operational level. These extra variables enhance the study in
understanding the influence of sustainability initiatives on the corporate financial performance.

25
Further, codebook representation of all the studies with their characteristics taking different
codes were developed. This was used to conduct a logit regression analysis.
‘Investor studies’ are those that analyse the financial performance of ESG funds,
portfolios or indices of the firms from the perspective of the asset managers (investors). Finally,
‘Thematic studies’ are the ones which emphasize on a specific theme such as climate change in
their studies as there is an increasing trend in the consideration of such themes while portfolio
decisions are taken by asset managers or investors due to the relatively higher tangible financial
risks posed by them.
The analysis of the primary studies were done using an ordered logit regression model
supported by a Shapley Shorrocks value decomposition. Further, a Bayesian Random effects
model was used for examining the existing meta-analyses. All the analyses were carried out in R
4.0 .
The findings from the study of the meta-analyses leads to the stylized facts observed by the
others. They are:
1. There exists a positive correlation between sustainability and financial performance at the
firm levels.
2. The impact of ESG investments on financial performance has on average been indifferent
from traditional investments.
3. Further, there is a lack of meta-analysis on the influence of climate finance.
The findings from the meta-analysis of the primary studies have been discussed further in the
data analysis section of the present paper.

2.2.3 ESG-Efficient Frontier

Lasse H. Pederson et al. (2021) proposed a theory and developed an ESG-Efficient Frontier in
which ESG Score is presented with two fundamental roles. Firstly, ESG score provides
fundamental information of the firms and secondly, it influences the investor preferences. With
the existence of a portfolio optimization problem, they put forth the ESG-Efficient Frontier as a
solution with the highest attainable Sharpe ratio with ESG Scores being the constraints. The
theory has been advanced further with empirical evidence weighing the costs and benefits of
ESG integration.

26
In short, the investors have been classified as three types. The first being Type U investors
reflecting the ESG Unaware investors followed by Type A- the ESG aware and Type M, The
ESG motivated investors. The Efficient point for Type U investors would be below the frontier
as they are the least bothered about the ESG Scores. However, Type A and M investors will find
a portfolio on the frontier reflecting the integration of ESG in their investment decision making.
While Type A investors try to match the best Sharpe Ratio with the best possible ESG score,
they find themselves at the peak of the curve. But the Type M investors are mostly concerned
with the ESG scores rather than the Sharpe Ratio. Hence, their portfolio decisions will also be
influenced by that behaviour, putting them in a position with ESG scores beyond that of the
score corresponding to the peak of the ESG-Efficient Frontier but with a lesser Sharpe ratio than
the type A investors. They are ready to sacrifice, if needed, the financial gains for the non-
financial outcomes of such shares. The authors have further elaborated upon their theory with
empirical backing.

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 Chapter -3

Background of the Study

3.1 Evolution of ESG

Environment, Social and Governance began long before than one can think of. Although in
different terminologies, the corporate world has always been mandated to follow socially ethical
practices and governance requirements. This can be also connected to the introduction of
Corporate Social Responsibility which began sprouting in the late 1800s. It was Howard Bowen,
father of CSR, who, in his book entitled “Social Responsibilities of a Businessman” (1953)
introduced the relationship between the responsibility of business entities to the society. Thereby,
he advocated the need for ethical considerations in businesses and also towards the stakeholders.
Later, the idea began to extend towards the concept of a social contract as introduced by the
Committee for Economic Development in 1971. The contract is grounded on the understanding
that business firms operate because they have been given the public consent which binds the
corporations to the society to serve their needs (Corporate Social Responsibility: A Brief History,
n.d.). Nevertheless, CSR is only a narrow component in the space of ESG which engulfs the
environmental, CSR and Governance initiatives of the corporations (The Global Compact, Who
Cares Wins: Connecting Financial Markets to a Changing World, 2004).
The pioneering evolution of ESG began at a speech by Kofi Annan at the Davos World
Economic Forum in 1999. Annan put forth a “Global Compact” which insisted the corporate
players engage with the UN to promote principles of a sustainable global economy. With the
backdrop of the post-cold-war world economy turning the world fragile, Annan also reiterated
that business firms and institutions should join hands “to embrace, support and enact a set of
core values in the areas of human rights, labour standards, and environmental practices”
(Pollman, 2022). The Global Compact came into force in 2000 which was followed by the
congregation of the first ever Institutional Investor Summit on Climate Risk. The resultant
outcome of the summit was the Investor Network on Climate Risk. The endeavours of Kofi

28
Annan to convene the Chief Executive Officers of top 55 financing institutions to take up a new
initiative, “Who Cares Wins” , led to the introduction of the term “ESG”. A report pertaining to
the initiative listed out on how the companies, asset management, brokers,etc. could incorporate
ESG issues in their actions.
The elements of ESG have their own intentions with E referring to the initiatives of the
institutions to curb the environmental degradation which is expected to be caused by their
business operations or as a whole and their stewardship towards protecting nature. Followed by S
are the social sector initiatives that aim to emphasize the entities’ engagement with the labourers,
employees, supply chain, community and customers related to their institutions. Finally, G
concerns the transparency and accountability of the corporate governance reflected in the
institutions’ managements, composition of committees, nondiscriminatory and fair practices in
pay, audits and shareholder rights.
The report stimulates the businesses to integrate ESG in their companies for a longer time
period. Moreover, it also encouraged analysts, brokers and investors to be informed about ESG
and incorporate them in their market and portfolio decisions.
Recent developments in the evolution of ESG is that of the European Union’s Sustainable
Finance Disclosure in 2019 which tries to establish an order in the sustainable investing scene as
it had gone haywire with no stringent rules or regulations (Byrne, 2022).

3.2 ESG - Global Scenario

The UN has launched a number of initiatives, including the UN Global Compact, UNEP
Finance, and Principles of Responsible Investment, to promote ESG investments for achieving
sustainable global change. As a consequence, there has been a noticeable improvement in how
businesses disclose the environmental and social effects of their actions. The UN creates ESG
policy toolkits to aid decision-makers in simplifying their decisions.
A notable initiative is the UNPRI. The United Nations Principles for Responsible
Investing (UNPRI) began in 2006 as a program supported by the United Nations. UNPRI works
as an international organisation, promoting the integration of ESG Factors in the investment or
portfolio decision making processes. The fundamental ideas of the UNPRI is put forth in the
form of six Principles for Responsible Investment. The six Principles are put into action by the

29
PRI and its global network of members. Its objectives are to help signatories incorporate
environmental, social, and governance issues into their investment and ownership choices, as
well as to understand the financial consequences of these issues. The UN supports the six
Principles that were developed by investors. UNPRI has over 4,000 signatories from more than
60 nations, reflecting assets worth more than US$120 trillion.
A global survey by PricewaterhouseCoopers (Asset Wealth Management Revolution
2022: Exponential Expectations for ESG, n.d.) reflected that the ESG- oriented institutional
investment is expected to witness a massive increase of 84 percent to US$33.9 trillion in 2026,
against US$18.4 trillion in 2021. Thus, the ESG focused investments would constitute 21.5
percent of the total global AUM by 2026. Further, ESG-focused AUM will increase by 53
percent to US$19.6 trillion in Europe, more than double in the United States to US$10.5 trillion,
and increase by more than three times to US$3.3 trillion in the Asia-Pacific region. Moreover,
Latin America, Africa and the Middle East are experiencing aggressive investments in ESG
products (Asset Wealth Management Revolution 2022: Exponential Expectations for ESG, n.d.).

3.3 ESG - Indian Scenario

The implementation of the ESG concept officially began when the Ministry of Corporate Affairs
released its guidelines for corporate social responsibility in 2009. Following the CSR, the
Securities Exchange Board of India (SEBI) ordered that the top 100 companies with listings by
market capitalization, ie. total value of the company's shares, should file the Business
Responsibility Reporting (BRR) based on the National Voluntary Guidelines in 2012. By 2015,
it had been expanded to include all of the top 500 businesses and in 2017, SEBI established an
Integrated Reporting system which made it easier for the top 500 business organisations to
voluntarily compile their BRR. SEBI subsequently extended the BRR to the top 1000
corporations in 2019. The SEBI finally issued the circular detailing the enactment of Business
Responsibility and Sustainability Reporting in 2021 (SEBI, 2021). The circular stated that there
is an increasing focus of investors and other stakeholders seeking businesses to be responsible
and sustainable towards the environment and society. Thus, reporting a company’s sustainability
practices is as vital as reporting their financial performance. The BRSR is intended towards
having quantitative and standardized disclosures on ESG parameters to enable comparability

30
across companies, sectors and time. Such disclosures will be helpful for investors to make better
investment decisions. The BRSR shall also enable companies to engage more meaningfully
with their stakeholders, by encouraging them to look beyond financials and towards social
and environmental impacts.
Two documents were published by SEBI in this regard and they were: BRSR Format and
BRSR Guidelines. The BRSR Format is categorized into three sections, namely, General
Disclosures, Management and Process Disclosures and Principle wise Performance Disclosures.
General Disclosures contain the general information about the entity ranging from their products
or services, operational activities, company size to transparency and disclosure compliances. It is
followed by the section on transparency wherein the businesses match their policies and
processes aligning with the principles put forth in the National Guidelines on Responsible
Business Conduct- Principles and Core Elements. Finally, these Principles have been elaborated
in the third section.
The trend in India as reported by Morningstar India states that Indian markets witnessed
an inflow of Rs 4884 crore in ESG investments in the financial year 2020-21 as compared to Rs.
2094 crores the previous year. This jump is also attributed to Covid-19 crisis. Additionally, the
mutual funds industry in India launched numerous ESG funds,namely, Quant ESG Equity Fund,
ICICI Prudential ESG, Aditya Birla Sun Life ESG, Mirae Asset ESG Sector Leaders ETF,
Invesco India ESG Equity and Kotak ESG Opportunities, in the later half of the financial year
2020-21. Out of these, SBI Magnum Equity ESG with Rs. 3518 crores is the first ever ESG Fund
in India and ICICI Prudential ESG Fund is the most successful new launch as it raised the
highest level of funds amounting to US$225 million in assets. In total, these funds had an asset
base of approximately Rs. 9900 crores as of March 2021. However, there was an outflow of
funds of about Rs. 315 crore in 2021-22 due to various micro and macro conditions. Recently,
Morningstar data noted the existence of 12 ESG- themed mutual fund schemes with assets under
management of over Rs 13,000 crore as of 2022 (“Sustainable Funds See Rs 315 Crore Outflow
in FY21-22,” 2022; “Inflows in Sustainable Funds Surge 76 % to Rs 3686 Crore in FY21,”
2021).

31
3.4 CRISIL ESG Index

Credit Ratings Information Services Limited developed a ‘Environment, Social, Governance

Risk Assessment Methodology’ which facilitates the evaluation and monitoring of the ESG risk
inherent in the investments, inter alia, equity and debts. The methodology rates the companies
across different sectors for their ESG Performance based on the information publicly available in
the company’s digital platforms, annual reports, sustainability reports, legal filings, company
profiles, and other third-party data sources etc..
The ESG Methodology applied by CRISIL can be summarized below.
Environment, Social and Governance has been assigned relevant weights such as 35, 25
and 40 percentages respectively to reflect the relative importance of each of the elements.
CRISIL believes that Governance is the driving force of Environment and Social. Therefore, it
has been given the utmost importance in the methodology. Environment and Social scores are a
combination of the company’s individual as well as the overall sector scores. There is a relative
assessment of the Environment and Social scores of the companies within the sectors ie., relative
to the peers within each sector. This enables not only a comparison within the sector but also
amongst different sectors. With respect to the scores, it ranges from 0 to 100 with 100 being the
highest score.

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 Chapter 4

Data Analysis and Interpretation

4.1 ESG performance and Financial performance at the Global level

In order to study whether ESG Funds act as an economic incentive to sustainable business
practices, the first objective is to examine the relationship between ESG performance and
Financial performance globally. The analysis of (Whelan et al., 2021), the meta-analysis of 245
primary studies published between 2015- 2020 supports the research in realizing the objective.
Out of the 245 samples, 159 were reviewed from the corporations’ perspective and the rest of the
studies, ie. 86 were from the investors’ perspective. As the current study deals only with the
fluctuations in the financial performance from the corporations’ perspective, the trends observed
in the link between the ESG performance and Corporate Financial Performance can be depicted
as follows:

Table: 4.1: Proportion of degrees of correlation observed in various corporate studies

STUDY TYPE RESULTS
TYPE COUNT Positive Negative Neutral Mixed
Corporate 159 92 13 21 33
% 57.86% 8% 13.21% 20.75%
Source: Compiled from ESG and Financial Performance: Uncovering the relationship by aggregating evidence
from 1,000 plus studies published between 2015-2020.

Table 4.1 shows the proportion of different degrees of correlation observed between the
variables, ESG Performance and Corporate Financial Performance in various corporate studies.
The observed degrees of correlation are positive, negative, neutral and mixed which can be
elaborated further.

33
 ‘Positive’ represents the proportion of studies which found a positive relationship
between the variables or were able to find a result supportive of the argument of ESG practices
or sustainability being associated with better or higher financial performance. This is also
inclusive of those studies which find a negative correlation between carbon emissions and
financial performance as it indicates an overall positive indication of sustainability and financial
performance.
‘Negative’ represents a critical finding of inverse relationship between ESG and
Financial performance indicating that high ESG performance can be associated with lower
Financial performance.
‘Mixed’ represents mixed results within a study leading to an inconclusive definite
relationship making it neither positive nor negative. This occurs when the same study focuses on
different time periods or analyses more than one subsample. Additionally, inclusion of
sustainability in multiple ways may lead to mixed outcomes.
‘Neutral’ represents the proportion of those studies which are unable to reach a
conclusive finding due to a lack of statistically significant coefficient. Also, there are a few
papers which abstain from commenting on the relationship and rather focus on a few of the
mediating factors affecting the relationship between ESG and Financial performance.

Figure 4.1: Nature of correlation between ESG & Financial Performance in

Corporate Studies

34
Source: Compiled from ESG and Financial Performance: Uncovering the relationship by aggregating evidence
from 1,000 plus studies published between 2015-2020.

Figure 4.1 depicts the nature of correlation between ESG and Financial Performance in
Corporate studies as observed in the secondary data analysis. Out of 159 independent studies
focusing on corporations ranging from 2015- 2020, 92 studies have inferred that ESG
performance is positively related to Financial performance which constitutes 58 percent of the
total papers considered. Meanwhile, 33 studies, constituting 21 percent, have drawn mixed
relationships wherein both positive and negative relationships were observed within the same
studies. It is followed by 21 studies, ie. 13 percent, concluding with a neutral association
between ESG and Financial performances. However, only 13 studies comprising a meager share
of 8 percent have drawn evidence to conclude that ESG performance is negatively related to
Financial performance (Whelan et al., 2021).
Additionally, the researchers conducted a meta- meta-analysis of over 13 corporate meta-
analyses covering about 1272 independent studies applying a quantitative approach on those
studies published since 2015. The second order meta-analysis substantiated the findings from the
meta-analyses of the 245 unique studies, inclusive of corporate, investor and thematic studies,
stating a positive correlation between ESG performance and Financial performance.
Furthermore, the authors related these studies with social science theories in research such as
stakeholder theory, shared value theory, legitimacy theory and research-based view. It was
observed that as much as 33 percent of the papers invoked stakeholder theory which emphasizes
that stakeholder management is integral for a company to remain successful. Meanwhile, only 16
to 25 percent of the studies were concerned with the other three theories. Further, generalizations
were made that those studies excluding any social science theory stand only one-in-three chances
of finding a positive association between ESG and Financial performance whereas on average,
the odds were one-in-two for those studies incorporating social science theories.

4.1.1 Outcomes

The meta analysis stated six key observations out of which the observations relevant to
this study have been further delved into and analysed in this section. With the help of the papers
that have been considered in the meta and meta-meta analyses, it can be concluded that there are

35
multiple results based on multi-dimensional approaches to the variables concerned. As the
significance of the study denotes, all the individual papers when studied separately lead to
complex and conflicting results whereas a culmination of all the primary and secondary (meta-
analyses like these) helps in generalizing the behaviour of the variables under study, namely,
Corporate Financial performance and ESG Performance. It can be deduced from the analysis
that:
➔ ESG performance induced improvements in Corporate Financial performance tends to
reflect in the long run rather than in the short run.
Stuart L. Hart and Gautam Ahuja (1996) observed that the Corporate Environment
Performance starts reflecting a positive impact on the Financial performance only after
one to two years due to the time lag in the market’s recognition of a firm’s corporate
environment performance. In their meta-analysis, the researchers have observed that the
proxy corresponding to an implied long-term relationship has a statistically significant
positive coefficient and is likely to be the same or have a neutral effect with a chance of
76 percent. This is further substantiated by (Hang et al., 2019) as they observed that
similar effects of sustainable investments were reflected in the financial performance not
in the short but in the long run. Additionally, (Dorfleitner et al., 2018) in their cross-
sectional study on firms with high ESG scores observed relatively higher stock returns
for such firms, outperforming the ones with weak ratings in the mid and long run. They
found increased returns up to 3.8 percent with regard to an increase of one standard
deviation of the ESG score. These results prove useful to the asset managers who expect
to experience abnormal returns by including firms with higher sustainability practices in
their portfolio.

➔ ESG investing has positive internal externalities such as downside protection,

particularly during social or economic crises.
Various studies across the globe have observed that firms with better ESG ratings have
outperformed or managed to have better risk adjusted returns than the conventional funds
during periods of downturn ie., the financial crisis (2007-2009) (Fernández et al., 2019).
Moreover, the stock value of such funds recovered quicker than the latter after the crisis.
The high rated ESG mutual funds have proven to outperform low-rated ones. (Das et al.,

36
 2018). Also, (Hale, 2020) observed during the first quarter of 2020’s COVID-19
downturn that 24 out of 26 ESG index funds showcased better performance against the
conventional funds. Towards the end of quarter, at least 45 percent of such funds
outperformed their counterparts.
➔ Improved financial performance induced by sustainability initiatives at corporations is
due to improved risk management and innovation.
ESG strategies prove useful in enhancing the financial performance through mediating
factors, also known as financial drivers, such as innovation, better risk management,
operational efficiency and others as observed by (Atz et al., 2021) . In their study to
monetize the potential and actual financial benefits, they concluded that the sampled
firms successfully made sustainable value addition for adopting sustainability strategies.
Monetisation of such benefits helps the asset managers to better understand and value the
sustainability initiatives and create competitive advantages, thereby, creating value for
the stakeholders.
➔ Sustainability practices such as decarbonisation strategies lead to substantial
improvement in the financial performance of the practitioners.
Alexander Cheema-Fox et al. (2019) explored the implications of decarbonization
strategies to find out that they created varied risk-adjusted returns. Particularly, the ones
which lowered carbon emissions lead to increased performance aggressively. Likewise,
an assessment of 736 US public enterprises from the time period ranging from 2005-2015
found that carbon efficient firms as compared to carbon inefficient firms earned abnormal
returns of 3.5 to 4.5 percent annually. Investments in such firms were profitable even in
the absence of government incentives because they had higher Return On Assets, Tobin’s
q and higher coverage ratios, cash holdings and free cash flows while maintaining lower
leverage ratios (In et al., 2019). Furthermore, other empirical evidence reflects that
FTSE’s Opportunities All Share Index, an index which is inclusive of green technologies
and strategies, experienced annual yield up to 4.9 percent, outperforming its counterpart
ie. FTSE Global All Cap Index from October 2015 to October 2020.
➔ ESG Disclosure is not a driving factor of financial performance.
While ESG disclosure is gaining momentum and attention in the mainstream, ESG
Disclosure alone will not help either sustainability or financial performance. Therefore,

37
studying disclosure without measuring the ESG Performance or metrics without any
strategy is apparently rather ineffective. (Kim & Yoon, 2023) explored the same in the
case of signatories of the United Nations’ Principles of Investment which, despite
attracting large fund inflows, on average, failed to improve either their ESG or their
financial performance. Interestingly, given the outcome based findings, it can be argued
that such firms are involved in greenwashing in spite of showcasing poor performance in
ESG related issues.

38
4.2 ESG Performance and Financial Performance in Indian Companies during 2022

An empirical evaluation of the degree of relationship between ESG performance and Financial
performance of Indian companies during 2022 is the second objective of exploring the role of
ESG Funds as an economic incentive for sustainable business practices. For this purpose, the
data has been collected on two variables, namely, ESG performance and Financial performance.
The ESG Scorecard 2022 published by CRISIL Rating Limited for Indian companies will
measure the ESG Performance of the entities in 2022 and the Earnings Per Share of the sample
companies in 2023 will be a proxy to the financial indicators.
The ESG scores reported by CRISIL is an average of the environment, social and
governance scores of the entities calculated individually. CRISIL has graded 601 Indian
companies on their ESG performance in 2022. They have categorised the companies based on
their final ESG scores into Leadership, Strong, Adequate, Below Average and Weak. Those
companies with ESG scores above 70 belong to Leadership, between 70 and 66 belong to Strong,
65 to 46 is categorised as Adequate, 45 to 31 are Below Average while any score equal to or
below 30 are Weak performers.
The basic Earnings Per Share is the ratio of a company’s net profits to the number of
outstanding shares of the company’s common stock. This acts as an indicator of the company’s
profitability as it reflects the profit earned by each share in its common stock. The higher the
EPS, higher is the profitability of the company. Further, EPS also serves as a metric enabling
comparison amongst companies belonging to the same industry, serving the purpose of
comparing the financial performance of different ESG categories.

4.2.1 Methodology of Analysis

Sampling

Out of 601 ESG rated companies, the present study has taken only 52 companies as samples for
the purpose of measuring the association between the two variables. The 52 samples represent an
aggregate of 67 percent of the sectors in the National Stock Exchange’s NIFTY 100 ESG Index

39
and 66 percent of the sectors in the National Stock Exchange’s NIFTY 500 ESG Index. The
samples were categorized into different sectors according to the National Industrial
Classification 2008. In particular, they belong to different industries namely, Information and
Technology, Internet, Telecommunications, Lending, Holding, Financial Services, Fast Moving
Consumer Goods, Road and Infrastructure, Construction, Oil & Gas Exploration and Production
and Cement. All of these industries have been classified as different sectors representing each
ESG category based on their score, namely, Leadership, Strong, Adequate and Below Average.
Although CRISIL categorized the companies into 5 including weak for the companies with the
lowest scores, there are only 2 companies out of 601 which attained weak scores deeming it
inadequate for comparison with the rest of the categories. Moreover, the number of companies
within each category across all the four categories is uneven. Therefore, 13 companies have been
taken as the representative sample out of all the four classifications.
A total of 14 companies out of the 601 companies are labeled as leaders in ESG Scoring.
Hence, 13 firms belonging to the sampled sectors have been included in the statistical analysis.
Followed by leaders are the strong performers; out of the 34 strong ESG firms, 13 are selected at
random. Representative companies are randomly chosen from the top, lowest and median range
performers within the strong category. Likewise, out of 480 adequate performers, 13 companies
are selected at random by applying the same methodology followed by 13 below average
performers out of 71 companies.
The next section elaborates on the statistical analysis of the relationship between ESG
Scores and EPS (Financial performance) with the application of Spearman’s Rank Correlation ,
T Statistic and Hypothesis Testing in Google Sheets/Excel.

Statistical Tools for Analysis

The statistical tool used for analysing the association between the ESG Scores and EPS is
Spearman’s Rank Correlation. Given the nature of data wherein the ESG Scores are in an
ordered rank format, it is imperative that we apply rank correlation rather than Pearson’s
Correlation as the latter is applicable only to continuous variables exhibiting a linear relationship.

40
Spearman’s rank correlation is a nonparametric test and is applicable to the sets of data which are
ordered in ranks for measuring the degree of monotonic relationship between them. The
correlation coefficient is calculated in the Excel in the following manner:
1. Ranks were assigned to both the variables in descending order.
2. The difference between the ranks of two variables ie., EPS rank - ESG Score Rank is
derived.
3. The difference is squared and added up.
4. Applied the Spearman’s rank correlation formula:
2 2
⍴=1−[6 Σ di /n(n −1)]
where,
⍴ = spearman’s rank correlation coefficient
2
Σ di = sum of the squared difference between the ranks of the two variables
n = number of observations
The correlation coefficient falls between the range of -1 and +1 where +1 denotes perfect
positive correlation and -1 denotes perfect negative correlation. If the value of ⍴ is between 0.8
and 1, there exists very high positive correlation between the variables. If it is above 0.5 but less
than 0.8, there is a high positive correlation. However, if the value of ⍴ falls below 0.5 but is
above 0.3, the variables are moderately positively correlated. While any value below 0.3 but
above 0 denotes low positive correlation whereas 0 reflects no correlation between the variables.
Once the Correlation coefficient has been calculated, the T statistic of the coefficient is
determined using one-tailed t-test. T- statistic is the ratio of the departure of the estimated value
of the parameter from its hypothesized value to its standard error. It helps hypothesis testing, in t-
test to decide whether to reject or not reject the null hypothesis.
The T-statistic has been computed in the Google Sheets using the formula:
T statistic=(|(r )|∗√ ( N −2))/( √ (1−|(r )2|))
The significance of the T statistic, i.e. p-value has been calculated in the Google Sheets using the
formula:
p−value=TDIST (T Statistic , Degrees of Freedom , tails)
Therefore, based on the p-value, the probability of obtaining a statistically significant coefficient
is concluded, leading to the rejection or acceptance of the null hypothesis. The t statistic can be

41
tested for significance at 1 percent, 5 percent or 10 percent level. Higher the size of the test, the
less stringent the significance test.

Hypotheses

The present study hypothesizes a null and an alternative hypothesis. They are:
H0 : There is no statistically significant relationship between the ESG Scores and the EPS.
H1 : There is a statistically significant relationship between the ESG Scores and the EPS.

4.2.2 Category wise Analysis of Correlation

The analysis is divided into two sections with each one focusing on the comparison of the
correlation of the ESG Score and EPS between two ESG categories. The first section compares
the relationship in the Leadership ESG category and the Strong ESG category. Sectors such as
Information & Communication, Financial Services and Fast Moving Consumer Goods represent
the two leading ESG Categories. The second section is the comparison between the Adequate
and Below Average category. Sectors such as Cement, Construction and Oil represent these two
categories. Such a division is to ensure the comparison of the financial performance between the
different degrees of ESG players within the same industry. The uneven proportions of companies
in each of the categories demand the classification as otherwise it will be insensible to compare
the financial performance for different degrees of ESG score with firms from different industries.
The present analysis deployed random sampling to organize the data on ESG score into
leadership and strong belonging to the same industry. Likewise, the companies chosen for the
Adequate and Below Average category fall under the same sectors enabling the comparison
between Adequate and Below Average ESG players.

4.2.2.1 Section 1: Comparison Between ESG Leadership and ESG Strong Companies

This section deals with the analysis and comparison of the financial performance of companies
classified as ESG Leaders and ESG Strong. The samples of those companies along with their
sectors, ESG Scores and EPS have been listed down and tested for any association between their

42
ESG and financial performance using Spearman’s Rank Correlation and Hypothesis Testing
using T test.

I. ESG Leadership
CRISIL lists those companies which have scored above 70 as ESG Leadership.

Table 4.2: List of Companies under Leadership along with their sector, ESG score and EPS
Company Name Sector classification ESG Score* EPS
Infosys Limited IT 76 56.3
MindTree Limited IT 76 115
Wipro Limited IT 74 20.7
Kotak Mahindra Bank Limited Lending 73 71.8
HDFC Bank Limited Lending 72 68.77
Housing Development Finance Lending 72 137
Corporation Limited
L&T Finance Holdings Limited Holding 72 5.91
Tata Consultancy Services Limited IT 72 111
Tech Mahindra Limited IT 72 53.6
Axis Bank Limited Lending 71 67
HCL Technologies Limited IT 71 53.3
Mahindra and Mahindra Financial Lending 71 16.3
Services Limited
Marico Limited FMCG 71 9.68

Note: * represents scores above 70 which are classified as Leadership.

Source: Compiled by the researcher from CRISIL ESG Scorecard 2022 and Screener-Stock Analysis and Screening
Tool.

It is evident from table 4.2 that the sectors such as Information & Communication, Financial
Services and Fast Moving Consumer Goods represent the Leadership category based on their
ESG Scores which range from 76 to 71.

43
 The graphical representation of the table will throw light on the trend in the EPS of the
companies scoring 76 to 71 for their ESG Performance, leading in India.

Figure 4.2: ESG & EPS Performance of Leader Companies

Source: Compiled by the researcher from CRISIL ESG Scorecard 2022 and Screener-Stock Analysis and Screening
Tool.

The table 4.2 reflects that companies representing Information & Communication, Financial
Services(Lending & Holding) and FMCG are the leading sectors in ESG Scoring. However, it is
evident from the figure 4.2 that the ESG scores cannot fully reflect the financial performance of
the companies as leading companies with a high ESG score of 76 and lesser scores of 72 and 71
have performed more or less in similar ranges financially.

44
Table 4.3 Ranks assigned to the ESG Score & EPS data on 13 selected Indian companies in
the Leadership category

LEADERSHIP (INFORMATION & COMMUNICATION, FINANCIAL SERVICES,

FMCG)

ESG SCORE EPS R1 R2 D D^2

76 56.3 1.5 7 -5.5 30.25
76 115 1.5 2 -0.5 0.25
74 20.7 3 10 -7 49
73 71.8 4 4 0 0
72 68.77 7 5 2 4
72 137 7 1 6 36
72 5.91 7 13 -6 36
72 111 7 3 4 16
72 53.6 7 8 -1 1
71 67 11.5 6 5.5 30.25
71 53.3 11.5 9 2.5 6.25
71 16.3 11.5 11 0.5 0.25
71 9.68 11.5 12 -0.5 0.25
N 13 Sum 209.5
Source: Computed by the researcher from CRISIL ESG Scorecard 2022 and Screener-Stock Analysis and Screening
Tool.

Table 4.3 contains the ESG Scores and EPS of 13 companies in the Leadership category , with
their ranks in the descending order and the differences and squared differences of the ranks. R1
denotes the ranks assigned to the ESG scores in descending order and R2, the EPS values.

45
 Table 4.4 Correlation coefficients and Significance of Leadership category

Spearman’s Rank T- Statistic Degrees of Freedom P-value

Correlation

0.4245 1.5547 11 0.07415*

Source: Computed by the researcher from CRISIL ESG Scorecard 2022 and Screener-Stock Analysis and Screening
Tool.
Note: *denotes significant at 10 percent level.

Table 4.4 shows the components and coefficients of correlation and significance of the data on
13 ESG Leader companies. The Spearman’s rank correlation coefficient between the ESG
Leadership and EPS is 0.4245 which denotes a positive moderate correlation between them. The
positive relationship implies that as one variable increases, the other variable also increases but
the increase in one variable will cause only a moderate influence on the other. The T- statistic
value is 1.5547 whereas its p-value is 0.07415, that is higher than 0.001 and 0.05, making it
insignificant at both 1 and 5 percent level of significance. However, the coefficient is significant
at 10 percent level as 0.07415 is less than 0.10. Hence, the null hypothesis that there is no
statistically significant relationship between ESG Leadership and EPS is rejected.

46
 II. ESG Strong
CRISIL lists those companies which have scored between 66 and 70 as ESG Strong.

Table 4.5: List of Companies under Strong along with their sector, ESG score and EPS
Company Name Sector classification ESG Score* EPS
LTIMindtree Limited IT 70 174
ICICI Bank Limited Lending 69 45.8
Zensar Technologies Limited IT 69 15

Hindustan Unilever Limited FMCG 68 41.8

Tata Communications Limited Telecom 68 64.4

CreditAccess Grameen Limited Lending 67 41

ICICI Securities Limited Financial Services 67 37

Tata Consumer Products Limited FMCG 67 12.5

Britannia Industries Limited FMCG 66 89

Equitas Holdings Limited Holding 66 7.42

Godrej Consumer Products Limited FMCG 66 15.8

Info Edge (India) Limited Internet 66 61.7

Federal Bank Limited Lending 66 13.3

Note: *denotes the Strong category ranging from 66 to 70.

Source: Compiled by the researcher from CRISIL ESG Scorecard 2022 and Screener-Stock Analysis and Screening
Tool.

It is evident from table 4.5 that the sectors such as Information & Communication, Financial
Services and Fast Moving Consumer Goods represent the Strong category based on their ESG
Scores which range from 70 to 66.

47
 Figure 4.3: ESG & EPS Performance of Strong Companies

Source: Compiled by the researcher from CRISIL ESG Scorecard 2022 and Screener-Stock Analysis and Screening
Tool

The table 4.5 reflects that companies representing Information & Communication, Financial
Services(Lending & Holding) and FMCG are the Strong sectors in ESG Scoring. However, it is
evident from the figure 4.3 that the ESG scores cannot fully reflect the financial performance of
the companies as strong companies with a lesser ESG score of 66 have performed better in ESG
as against those with higher scores of 69, 68 and 67.

48
 Table 4.6: Ranks assigned to the ESG Score & EPS data on 13 selected Indian companies
in the Strong category

STRONG (INFORMATION & COMMUNICATION, FINANCIAL SERVICES, FMCG)

ESG SCORE EPS R1 R2 D D2

69 45.8 2.5 5 -2.5 6.25
67 37 7 8 -1 1
66 7.42 11 13 -2 4
67 41 7 7 0 0
66 13.3 11 11 0 0
68 41.8 4.5 6 -1.5 2.25
67 12.5 7 12 -5 25
66 89 11 2 9 81
66 15.8 11 9 2 4
70 174 1 1 0 0
69 15 2.5 10 -7.5 56.25
68 64.4 4.5 3 1.5 2.25
66 61.7 11 4 7 49
N 13 Sum 231
Source: Computed by the researcher from CRISIL ESG Scorecard 2022 and Screener-Stock Analysis and Screening
Tool.

Table 4.6 contains the ESG Scores and EPS of 13 companies in the Strong category , with their
ranks in the descending order and the differences and squared differences of the ranks. R1
denotes the ranks assigned to the ESG scores in descending order and R2, the EPS values.

Table 4.7: Correlation coefficients and Significance of Strong category

Spearman’s Rank T- Statistic Degrees of Freedom P-value

Correlation

0.3654 1.3019 11 0.10978ns

Source: Computed by the researcher from CRISIL ESG Scorecard 2022 and Screener-Stock Analysis and Screening
Tool.
Notes: ns- denotes insignificance.

49
Table 4.7 shows the components and coefficients of correlation and significance of the data on
13 ESG Strong companies. The Spearman’s rank correlation coefficient between the ESG Strong
and EPS is 0.3654 which denotes a positive moderate correlation between them. The positive
relationship implies that as one variable increases, the other variable also increases but the
increase in one variable will cause only a moderate influence on the other. The T- statistic value
is 1.3019 whereas its p-value is 0.10978, that is higher than 0.001, 0.05 as well as 0.10, making it
insignificant at all the three levels of significance. Therefore, the correlation represented by the
coefficient is statistically insignificant. Therefore, there exists inadequate evidence to reject the
null hypothesis and establish that the relationship between the ESG Strong companies and EPS
are not due to chance.

50
4.2.2.2 Section II: Comparison Between ESG Adequate and ESG Below Average
Companies

Section II deals with the comparison of ESG Adequate firms and their EPS against the ESG
Below Average firms in India during 2022. The samples along with their sectors, ESG Scores
and EPS have been listed down and tested for any association between the variables using
Spearman’s Rank Correlation and Hypothesis Testing using T test.

III. ESG Adequate

CRISIL lists those companies which have scored between 46 and 65 as ESG Strong.
Table 4.8: List of Companies under Adequate along with their sector, ESG score and EPS
Company Name Sector classification ESG Score* EPS
Gail India Limited Oil and Gas - Gas 63 12.83
Ambuja Cements Limited Cement 61 9.76

Hindustan Petroleum Corporation Oil and Gas - OMC 60 -60.4

Limited
Adani Total Gas Limited Oil and Gas - Gas 57 4.56
JK Cement Limited Cement 56 66.7
Engineers India Limited Construction EPC 55 4.19

Hindustan Construction Company Construction EPC 52 -1.23

Limited
Oil India Limited Oil & Gas - E&P 51 84
ITD Cementation India Limited Construction EPC 50 5.98

Chennai Petroleum Corporation Oil and Gas - OMC 48 237

Limited
Birla Corporation Limited Cement 47 8.65

JK Lakshmi Cement Limited Cement 46 36.7

Power Mech Projects Limited Construction EPC 46 123

Note: *denotes the Adequate category scores ranging from 46 to 65.

Source: Compiled by the researcher from CRISIL ESG Scorecard 2022 and Screener-Stock Analysis and Screening
Tool.

51
It is evident from table 4.8 that the sectors such as Cement, Construction and Oil represent the
Adequate category based on their ESG Scores which range from 46 to 65.

Figure 4.4: ESG & EPS Performance of Adequate Companies.

Source: Compiled by the researcher from CRISIL ESG Scorecard 2022 and Screener-Stock Analysis and Screening
Tool.

Table 4.8 reflects that companies representing Oil & Gas, Cement and Construction are the
sectors categorized under the Adequate ESG scoring. However, it is evident from figure 4.4 that
the ESG scores cannot fully reflect the financial performance of the companies as the graph
reflects a negative relationship between ESG and financial performance. The high ESG
performers in this category, i.e. from 63 to 50 except the companies with scores 56 and 51 have
performed relatively worse as compared with the companies with lesser ESG scores such as 48
and 46.

52
 Table 4.9: Ranks assigned to the ESG Score & EPS data on 13 selected Indian companies
in the Adequate category

ADEQUATE (CEMENT, CONSTRUCTION, OIL)

ESG SCORE EPS R1 R2 D D2

63 12.83 1 6 -5 25
61 9.76 2 7 -5 25
60 -60.4 3 13 -10 100
57 4.56 4 10 -6 36
56 66.7 5 4 1 1
55 4.19 6 11 -5 25
52 -1.23 7 12 -5 25
51 84 8 3 5 25
50 5.98 9 9 0 0
48 237 10 1 9 81
47 8.65 11 8 3 9
46 36.7 12.5 5 7.5 56.25
46 123 12.5 2 10.5 110.25
N 13 Sum 518.5
Source: Computed by the researcher from CRISIL ESG Scorecard 2022 and Screener-Stock Analysis and Screening
Tool.

Table 4.9 contains the ESG Scores and EPS of 13 companies in the Adequate category , with
their ranks in the descending order and the differences and squared differences of the ranks. R1
denotes the ranks assigned to the ESG scores in descending order and R2, the EPS values.

53
 Table 4.10: Correlation coefficients and Significance of Adequate category.

Spearman’s Rank T- Statistic Degrees of Freedom P-value

Correlation

-0.4245 1.5547 11 0.0741*

Source: Computed by the researcher from CRISIL ESG Scorecard 2022 and Screener-Stock Analysis and Screening
Tool
Note: *denotes significant at 10 percent level.

Table 4.10 shows the components and coefficients of correlation and significance of the data on
13 ESG Adequate companies. The Spearman’s rank correlation coefficient between the ESG
Adequate and EPS is -0.4245 which denotes a negative moderate correlation between them. The
inverse relationship implies that as one variable increases, the other variable decreases but the
increase in one variable will cause only a moderate influence on the other. The T- statistic value
is 1.5547 whereas its p-value is 0.0741, that is higher than 0.001, 0.05 but less than 0.10, making
it significant at 10 percent level of significance. Therefore, the correlation represented by the
coefficient is statistically significant at 10 percent. Hence, there exists adequate evidence to
reject the null hypothesis and establish that the relationship between the ESG Strong companies
and EPS are not due to chance.

54
IV. ESG Below Average
CRISIL lists those companies which have scored between 31 and 45 as ESG Below Average.

Table 4.11: List of Companies under Below Average along with their sector, ESG score and
EPS
Company Name Sector classification ESG Score* EPS

J. Kumar Infraprojects Limited Construction EPC 45 36.3

NCL Industries Limited Cement 45 11.6

Ahluwalia Contracts India Construction EPC 44 24.5

Limited
G R Infraprojects Limited Road Infrastructure 43 139

Star Cement Limited Cement 43 5.94

Nayara Energy Limited Oil and Gas - OMC 42 16.4

PNC Infratech Limited Road Infrastructure 42 29.6

Ashoka Buildcon Limited Road Infrastructure 41 20

KNR Constructions Limited Construction EPC 41 16

India Cements Limited Cement 39 2.89

Sadbhav Infrastructure Project Road Infrastructure 38 -15.3

Limited
MEP Infrastructure Developers Road Infrastructure 37 -17.4
Limited
Simplex Infrastructures Limited Construction EPC 36 -91.4

Note: *denotes the Below Average category ranging from 31 to 45.

Source: Compiled by the researcher from CRISIL ESG Scorecard 2022 and Screener-Stock Analysis and Screening
Tool.

It is evident from table 4.11 that the sectors such as Cement, Construction and Oil represent the
Adequate category based on their ESG Scores which range from 31 to 45.

55
 Figure 4.5: ESG & EPS Performance of Below Average Companies

Source: Compiled by the researcher from CRISIL ESG Scorecard 2022 and Screener-Stock Analysis and Screening
Tool.

The table 4.11 reflects that companies representing Oil & Gas, Cement and Construction are the
sectors categorized under the Below Average ESG scoring. Figure 4.5 is the graphical
representation of the relationship between the ESG Below Average and Financial performance. It
shows a mixed relationship as high ESG performers with scores between 45 and 41 except the
ones with scores such as 45 and 43 have very low financial performance. Interestingly, there’s a
positive relationship between the worst ESG Performance and low financial performance of
those companies.

56
Table 4.12: Ranks assigned to the ESG Score & EPS data on 13 selected Indian companies
in the Below Average category

BELOW AVERAGE (CEMENT, CONSTRUCTION, OIL)

ESG SCORE EPS R1 R2 D D2

45 36.3 1.5 2 -0.5 0.25
45 11.6 1.5 8 -6.5 42.25
44 24.5 3 4 -1 1
43 139 4.5 1 3.5 12.25
43 5.94 4.5 9 -4.5 20.25
42 16.4 6.5 6 0.5 0.25
42 29.6 6.5 3 3.5 12.25
41 20 8.5 5 3.5 12.25
41 16 8.5 7 1.5 2.25
39 2.89 10 10 0 0
38 -15.3 11 11 0 0
37 -17.4 12 12 0 0
36 -91.4 13 13 0 0
N 13 Sum 103
Source: Computed by the researcher from CRISIL ESG Scorecard 2022 and Screener-Stock Analysis and Screening
Tool.

Table 4.12 contains the ESG Scores and EPS of 13 companies in the Below Average category ,
with their ranks in the descending order and the differences and squared differences of the ranks.
R1 denotes the ranks assigned to the ESG scores in descending order and R2, the EPS values.

57
 Table 4.13: Correlation coefficients and Significance of Below Average category.

Spearman’s Rank T- Statistic Degrees of Freedom P-value

Correlation

0.7170 3.4118 11 0.003**

Source: Computed by the researcher from CRISIL ESG Scorecard 2022 and Screener-Stock Analysis and Screening
Tool
Note: ** denotes significant at 5 percent level.

Table 4.13 shows the components and coefficients of correlation and significance of the data on
13 ESG Below Average companies. The Spearman’s rank correlation coefficient between the
ESG Adequate and EPS is 0.7170 which denotes a positive high correlation between them. The
positive relationship implies that as one variable increases (decreases), the other variable also
increases (decreases) and the increase in one variable will cause comparatively high influence on
the other. The T- statistic value is 3.4118 whereas its p-value is 0.003, that is higher than 0.001
but less than 0.05, making it significant at 5 percent level of significance. Therefore, the
correlation represented by the coefficient is statistically significant at 5 percent. Hence, the null
hypothesis can be rejected with greater confidence.

58
4.3 Establishing a functional relationship between ESG Fund Supply and
Asymmetric Information and ESG Risk Adjusted Returns

Based on the extensive literature review, it was observed that the lack of availability of data on
the ESG Performance of the companies are at the cost of ESG Fund inflows to those companies.
(Esty & Cort, 2017). Even in the case of Credit Ratings, (Myers & Majluf, 1984) have proven
that lack of information in the market may lead to underinvestment in good portfolios.
Additionally, there is credible literature to substantiate that both asymmetric information
(Pederson et al., 2021; Mulchandani et al., 2022; Usman et al., 2020) and Idiosyncratic risks
(Horn, 2023) play a crucial role in the portfolio selection process of responsible or sustainable
investors. This rising trend in responsible investment leads to the increasing demand for non-
financial data. (Zumente & Lāce, 2021). Consequently, the increased demand for non-financial
ESG information leads to increased ESG documentation and data availability. Therefore, we can
deduce from these observations that the investors’ behaviour showcases an interest towards
incorporating ESG in investment strategies which is reflected in their purchase of valuable ESG
data from the developing lines of ESG Providers. (Douglas et al., 2017). However, the
observations do not rule out the fact that rational investors will be wary of the risks associated
with ESG investments and the impact of the same on the returns of their portfolio.
Additionally, investors may incorporate ESG ratings in order to assess the risks of the
portfolios. (Renneboog et al., 2008). Numerous papers (EDHEC- Risk Climate Impact Institute,
n.d.; Giese et al., 2019; Ashwin Kumar et al., 2016) have explored the link between ESG risk
and returns to find favourable outcomes with observations of studies claiming lower volatility of
ESG integrated portfolios. (Horn, 2023). The notion of ESG Disclosure reducing the risks of the
portfolio stems from the observations and findings that higher ESG Disclosure implies higher
transparency and lesser volatility of the portfolio with respect to ESG activities of the companies.
Higher disclosure and transparency improves the valuation of the firm by reducing the
information asymmetries, capital constraints, reputational risks and consequently, the capital
costs. (Cheng et al., 2014; Erragragui, 2018; Ng & Rezaee, 2015 ; Yu et al., 2018; Ghoul &
Karoui, 2017). While ESG rating is given due significance, the rate in itself is not given great
importance as when comparing a non- ESG rated portfolio, even with weak ESG performance

59
(Eliwa et al., 2021), with an ESG- rated portfolio, the idiosyncratic risks are presumed to be
always lesser for the latter. Because, the former reflects lesser transparency and therefore, a
greater threat to the portfolio as it adversely affects the firm’s value (Wong et al., 2021).
The present study establishes that ESG Investment Supply is negatively related to
Asymmetric Information and positively related to ESG Risk Adjusted Returns. ESG Investment
Supply Function can be mathematically represented as below:

ESG Investment Supply=f ¿)

Where, ESG investment supply is a function of the weighted values of ESG Risk
Adjusted Returns and Asymmetric Information with weights θ and 1- θ respectively. Here, ESG
Risk Adjusted Returns is represented by the Sharpe Ratio (Pederson et al., 2021) which is the
ratio of the difference between the expected return and risk-free return to the standard deviation,
alternatively, the reward-risk ratio whereas Asymmetric Information is indicated by the ESG
Disclosure Score (Fatemi et al., 2018) which reflects the percentage of aggregate level of ESG
disclosed out of the total quantitative ESG data points drawn from global standards (Fatemi et
al., 2018; ESG Disclosure Score Tool | Sustainable Finance | LSEG, n.d.).
The weights assigned to the determinants range from 0 to 1 because it is understood that a
rational investor would prioritize the determinant of their interest rather than giving equal
importance to all the determinants. For example, the Modern Portfolio theory explains that the
investors will prefer to maximize their expected returns for a certain level of risk. Therefore, an
investor is assumed not to give the same weightage to Asymmetric Information as is given to
ESG Risk- Adjusted Returns. Hence, the weightages vary according to the type of investors. The
present study uses the classification of investors as identified by (Pederson et al., 2021). Based
on which the investors are of three kinds, namely, ESG Unaware, ESG Aware and ESG
Motivated investors represented as U, A and M respectively. Grounded on the behaviour of these
investors as assumed in (Pederson et al., 2021), the Type U investors are least bothered about the
ESG and therefore, are not concerned about the Asymmetric Information, leading to them
weighing the ESG Risk adjusted returns more than the Asymmetric Information. Consequently,
θ value will presumably be greater than 0.5 i.e. more than half of the weightage is given to the
risk-return variable. However, they are not under the purview of this function as the relationship

60
is expressed only between ESG investment supply and its determinant which implicitly means
that the study considers only those investments inclusive of ESG integration.

The study is oriented towards the rest of the two investors namely, Type A and Type M
as they are presumed to incorporate ESG in their portfolios. In the case of Type M investors,
they are the opposite of Type U and are ESG motivated, leading to them weighing ESG
Information more than the ESG Risk Adjusted Returns. This leads to a θ value less than 0.5
which implies that the weightage given to Asymmetric Information i.e. 1- θ is greater than 0.5.
In case if the investor is of Type A, they are aware of ESG and are incorporating ESG
Information in their portfolio decision making process. Therefore, they are assumed to value and
weigh both the determinants more or less similarly ,attributing the same magnitude of weights
for both the variables. Hence, the value of θ is 0.5 in this case, weighing both risk-return and
information variables equally. These observations are in line with the ESG- Efficient frontier put
forth by (Pederson et al., 2021).
The ESG-Efficient Frontier is a hump shaped curve with the horizontal and vertical axes
representing the ESG Score and the Sharpe Ratio respectively. The Type U investors who are not
bothered about the ESG Score will opt for a portfolio under the frontier. Meanwhile, the Type A
investors will be at the peak of the curve as they prefer that investment opportunity with the best
possible sharpe ratio for a given level of ESG score, weighing both equally leading to a θ value
of 0.5 . Any point to the right of this peak denotes the ESG Efficient frontier where the Type M
investors choose their portfolio motivated by ESG. However, the Sharpe ratios for the
subsequent ESG Scores beyond the peak are lesser than that expected for the Type A
investments. This reflects the attitude and preference of the Type M investors who are ESG
concerned more than the ESG Aware investors leading to less than half weightage given to θ .
Such investors might continue to invest even if the stock is underperforming financially (Bauer
et al., 2021) due to the existence of non-financial utility (Renneboog et al., 2008; Ghoul &
Karoui, 2017) and the possibility of lower systematic risks (Albuquerque et al., 2019; Ashwin
Kumar et al., 2016; Morgan Stanley, 2015; EDHEC- Risk Climate Impact Institute, n.d.).
In simple words, ESG Investment Supply can be expressed as positively related to the
ESG Risk Adjusted Returns and inversely related to Asymmetric Information. As the ESG Risk
Adjusted Returns increase, the asset or the share is presumed to be profitable, thereby attracting

61
more sustainable investors. However, the greater the asymmetricity in information, the lesser the
ESG investors attracted to such investments. Because, non disclosure is also an indicator of
lesser transparency and therefore, higher idiosyncratic risks (Wong et al., 2021). Although the
level of such risk depends on the strength of ESG Disclosure, the practice of ESG Disclosure
itself leads to a significant reduction in the idiosyncratic risk as against the stocks with no ESG
Disclosures or ratings. Moreover, the notion of higher risk reaping higher returns is refuted here
as studies (Mishra & Modi, 2013; Becchetti et al., 2015; Sassen et al., 2016; Bouslah et al., 2013;
Bouslah et al., 2018; Dunn et al., 2018; Giese et al., 2019; Monti et al., 2022) prove that ESG
Disclosure reflects lower idiosyncratic risk as against those with no ESG Disclosures.

4.3.1 Other Factors affecting the Effectiveness of ESG Disclosure

Berto Usman et al., (2020) concluded that there exists a negative yet insignificant relationship
between CSR Reporting, an indicator of ESG performance disclosure and bid- ask spread, i.e. the
difference between the price that investors are ready to pay for the share and the price at which
the firms are selling their shares, an indicator of asymmetric information. The difference in the
spread is due to the difference in the information available to both the parties involved in the
stock exchange. Therefore, higher spread denotes higher asymmetricity in information. Their
findings throw light on other factors affecting the effect of disclosure on the asymmetricity of
information, namely, the timeliness of reporting (Botosan & Harris, 2000) and the quality of the
disclosures (Michelon et al., 2015). It is observed that voluntary CSR disclosure is considered as
a mere getaway to gain publicity. The voluntary disclosure theory of (Verrecchia, 1983; Dye,
1985) argues that a firm’s ESG activities will influence their ESG Reporting. Therefore, a
company with good performance tends to report extensively while the opposite is the case if the
firms are poor performers at ESG. This is substantiated by (Cahan et al., 2015) as they observed
that good ESG Performance encourages reporting as it attracts publicity and consequently, a
higher valuation of the firms. Hence, the voluntary nature and the lack of standardized reporting
leads to a lack of completeness in the data. With regard to the reporting time, (Botosan & Harris,
2000; Usman & Yennita, 2018; Usman, 2020) found out that quarterly reporting rather than
yearly reporting could prove useful as it signals the seasonal trends in the stocks, communicates
crucial patterns and facilitates instantaneous trading. Therefore, due to the peculiar nature and

62
timing of CSR reporting, disclosures were considered inadequate to truncate the level of
information asymmetry. (Usman et al., 2020). Additionally, their findings suggest that CSR
Practices and ESG Performance are contemporaneous and the association between these
variables and the asymmetric information, although weak, is statistically insignificant. If at all
the bid-ask price changes due to the ESG or CSR practices, that is only when the ESG
performance’s effects are fully absorbed by the market players , reflecting the presence of a time
lag. However, (Dhaliwal et al., 2012) finds out that high- quality soft disclosure is significantly
related to cash flows and cost of capital elements of a firm.
Further, (Mulchandani et al., 2022) empirically studies the relationship between the ESG
Performance disclosure and Ke, Cost of capital. The study deduced a negative relationship
between the variables because the investors who are ESG concerned are worried about the long
term sustainability performance of the companies and hence, are ready to provide capital at
lesser costs. This acts as an incentive for the companies to disclose their ESG Practices.
Moreover, this finding substantiates the argument of an inverse relationship between asymmetric
information and ESG Fund availability. This reassures the fact that proper disclosure of ESG
performance is a crucial factor in influencing both the investors and the companies.

4.3.2 ESG and Risk-Adjusted Returns

Several studies (Ashwin Kumar et al., 2016; EDHEC- Risk Climate Impact Institute, n.d.; Horn,
2023; Morgan Stanley, 2015) have analysed the impact of ESG integration and disclosure on the
risk and returns of such stocks. In their review of studies, sustainable mutual funds were found
to experience either the same or higher median returns as well as same or lower median stock
risk or volatility during 64 percent of the seven years’ time period that the study was conducted
as compared to their conventional counterparts (Morgan Stanley, 2015). In addition, (Eccles et
al., 2014) observed that companies implementing environmental and social activities for a long
time showcased low volatility, specifically, 1.43 percent on a value-weighted and 1.72 percent
on an equal-weighted base than the non-ESG stocks which exhibited 1.72 percent and 1.79
percent respectively. (Ashwin Kumar et al., 2016) points out that 9 in 12 industries incorporating
ESG factors exhibited on average 28.67 percent lower annual stock return volatility as opposed
to non-ESG funds. These findings imply a risk premium which is the difference in the stock

63
return volatility related to the non-ESG companies. However, it was found that ESG practices
affect industries differently and that such practices could significantly reduce the risk based on
the peculiarities of the industries. Besides, the study makes a strong statement from their
empirical evidence that lower risk does not necessarily mean lesser returns as conceived by the
traditional thinkers. This was validated by their findings of ESG concerned stocks in 8 out of 12
industries experiencing better returns ranging from 2.25 percent to 31.84 percent against their
peers. Nevertheless, it is also possible that the same returns could be earned but with lesser risks.
Thus, ESG stocks tend to be less volatile and more efficient than their counterparts.
The literature review reflects upon the existence of immense studies with respect to risks
and ESG incorporations in the early 2000s as well. A study in the recent past (De & Clayman,
2015) concluded a strong inverse relationship between ESG rating and stock volatility. On top of
that, their findings were also applicable to downside risks as observed during the 2008 financial
crisis. (Cornell & Damodaran, 2020) also reflect similar findings wherein low ESG rated
companies were exposed to a variety of reputational and disaster risks with long term
consequences either in human or financial forms. (EDHEC- Risk Climate Impact Institute, n.d.)
concludes that ESG investing should be pursued not for the disputable allegations of improved
financial returns rather for the unique environmental and social benefits that accrue only to such
funds.

64
 Chapter 5

Findings, Suggestions and Conclusion

5.1 Key Findings of the Study

The findings of the study from the statistical analysis are elaborated upon in the following
chapter according to the listed objectives.

5.1.1 To examine the correlation between ESG performance and Financial performance
globally

1. 58 percent of the corporate studies have concluded with the existence of a perfect
positive relationship between the ESG and Corporate Financial Performance as
opposed to a meager share of 8 percent stating a negative association. While, 21
and 13 percent of the studies recorded mixed and neutral results respectively.
2. The meta-meta analysis of 1272 independent studies have substantiated the
positive findings observed in the meta-analysis of the 245 unique studies.
Thereby, strengthening the outcomes of the first level meta-analysis.
3. It was observed that the studies which were grounded on social-science based
theories had one-in-two chances of reporting a positive association whereas the
odds were only one-in-three for those studies excluding the social-science
theories. It is observed that 33 percent of studies invoked the stakeholder theory
while 16 to 25 percent of the studies were concerned with shared value theory,
legitimacy theory and research-based view.
4. Corporate Financial Performance tends to benefit from ESG Performance in the
long (and medium) rather than in the short run due to a time lag. This has been
empirically supported and a positive or neutral relationship is 76 percent likely to
occur in the long run.
5. ESG investing provides internal externalities in the form of downside protection
and at least 45 percent of ESG Rated funds outperformed the conventional funds
during crises. Thereby, such funds enhance even the risk adjusted returns through

65
 improved risk management, and innovative sustainability practices such as
decarbonisation strategies.

5.1.2 To analyse the degree of relationship between ESG performance and Financial
Performance in Indian companies during 2022

The empirical findings from the statistical analysis of the association between ESG Performance
and EPS in 52 Indian companies based on the CRISIL ESG Score 2022 and the EPS values as of
March 2023 is detailed below.

Table 5.1: Empirical results of Spearman’s Rank Correlation Analysis on 52 Indian

Companies based on their ESG Score and EPS values for 2022
Category Correlation Coefficient T statistic P value
Leadership 0.4245 1.5547 0.07415*
Strong 0.3654 1.3019 0.10978ns
Adequate -0.4245 1.5547 0.0741*
Below Average 0.7170 3.4118 0.003**
Source: Computed by the researcher from CRISIL ESG Scorecard 2022 and Screener-Stock Analysis and Screening
Tool.
Notes: ** - 5 percent; * - 10 percent significance level; ns - insignificance.

Table 5.1 summarizes the statistical analysis with the following findings:
1. All the companies belonging to the Leadership, Strong and Below Average
category experienced a positive relationship between their ESG Scores and EPS
values with the first two categories reflecting a positive moderate correlation and
below average category reflecting a high positive correlation while the Adequate
category alone experienced a negative moderate relationship between the
variables.
2. The correlation coefficients and t-statistics corresponding to Leadership,
Adequate and Below Average except Strong category are statistically significant
with the Leadership and Adequate being significant at 10 percent and Below
Average, at 5 percent level.

66
 3. The significance of the coefficients imply that there is enough evidence to reject
the null hypothesis stating that there is no statistically significant relationship
between the ESG Performance and the EPS of the companies belonging to the
Leadership, Adequate and Below Average Category. Thereby, it can be concluded
that the ESG and Financial Performance of the companies belonging to all the
categories except Strong are correlated.
4. There is no statistically significant evidence to not reject the null hypothesis in the
case of the Strong category. Therefore, there exists no significant relationship
between the ESG Strong category scores and the EPS of those companies.
5. It can be concluded that while comparing Leadership and Strong companies
belonging to Information & Communication, Financial Services and Fast Moving
Consumer Goods sectors, the companies with Leadership scores experience a
moderate increase in either ESG Score or EPS as the other variable increases,
denoting a positive correlation as against the companies with Strong ESG scores.
6. In comparison between the Adequate and Below Average companies belonging to
Oil & Gas, Cement and Construction sectors, the companies with Adequate ESG
scores experience an inverse relationship between the ESG and EPS performance
as opposed to the companies with Below Average ESG scores which experienced
a positive relationship between the variables indicating that low ESG performance
and low financial performance are correlated.

5.1.3 To establish a functional relationship between ESG Fund Supply and Asymmetric
Information and ESG Risk Adjusted Returns.

The study observes that ESG Investment Supply can be inversely related to the Asymmetric
Information and positively related to ESG- Risk Adjusted Returns, given that profit is the prime
determinant of ESG Fund supply. The extensive literature substantiates the observations made by
the study.
1. There is a lack of ESG Information which may lead to underinvestment in
profitable portfolios. Correspondingly, there is ample evidence to show the

67
 increased demand for ESG information which is encouraging ESG documentation
as observed in the literature.
2. ESG Integration also showcases increased transparency of the operations of the
companies leading to lesser idiosyncratic risks and asymmetricity regarding risk-
adjusted returns. Therefore, ESG ratings are indicative of the firm’s risks wherein
ESG rated stocks reflected lower idiosyncratic risk for equal or higher returns.
This is against the conventional notion of higher risks bringing higher returns.
3. ESG- rated portfolios have recorded better performance during crises and lower
downside risks as against their conventional counterparts as is also observed in
the meta-analysis of over 1000 plus studies. Further, empirical evidence from
prior literature states that sustainable mutual funds reaped either the same or
higher median returns for same or lower median portfolio risks. Besides, they
showcased lower volatility than the non-ESG stocks.
4. Additionally, the study observed that the effectiveness of ESG Disclosure
depends on various other secondary factors namely, the nature (voluntariness) and
timing of reporting and also the existence of standardized scoring methodologies.
Quarterly rather than yearly reporting proves effective as it provides information
adjusted for seasonal trends in the stock value. The higher the voluntariness,
higher the asymmetricity and lesser the ESG Disclosure because it benefits the
entities by giving them the choice to publish data for mere publicity by hiding the
crucial information regarding their downfalls in sustainability. In fact, it leads to
greenwashing.

5.1.4. Summary of Findings

The culmination of all observations recorded from the analysis of the three findings help in
ascertaining the role of ESG Funds in the business world. Initially, the study of the meta-
analyses conducted on 159 studies across the globe helps in determining the general trend in the
correlation between ESG and Financial Performances observed in all the 159 corporate studies. It
can be deduced that there exists a positive correlation between the variables concerned. Recent
global surveys conducted on institutional investors also substantiate the findings of a positive

68
correlation. However, it is subject to fluctuations as ESG funds are guaranteed to produce
favourable outcomes in terms of improved financial performance at par with or more than those
from conventional funds mostly during medium or short run and reduce downside risks during
times of uncertainties and crises. Therefore, positive or neutral outcomes, whatsoever, is a matter
of time as well.
Secondly, the analysis and comparison of the 52 Indian companies in Leadership,
Strong , Adequate and Below Average ESG categories put forth by CRISIL shows mixed results.
However, these findings may be conditional upon the influence of sector or industry specific
changes as well as due to the differences in the magnitude of the financial performance
indicators. Further, the overall low correlation coefficients for each category can be attributed to
ESG being one among the less significant or secondary factors affecting the financial
performance of Indian companies. In addition, ESG disclosure and integration in Indian markets
has gained mainstream attention only recently since the publication of the SEBI’s circular and
mandate regarding BRSR. Therefore, given the observations (Whelan et al., 2021), ESG’s
influence on Financial performance can be realized only in the medium or long run as is also
noticed in the meta-analysis. On top of that, the studies can yield better results and facilitate
comparisons if the methodologies are standardized across the nation. Moreover, mere disclosure
alone cannot appropriately indicate the ESG performance as findings, for example, in the case of
the signatories of the United Nationa’s Principles of Investment, reflect upon their actions of
greenwashing. Therefore, the ESG strategies per se, rather than the disclosure should be
extensively studied to produce a clear picture of the performance of ESG Stocks.
Finally, several studies show mixed results regarding the influence of ESG Disclosure on
the financial performance, stock return volatility and the availability of ESG funds. Yet, it is
observed that the conclusions depend on the nature, scope and the methodology of the research.
Moreover, it is imperative that comprehensive research on the linkages between ESG
Performance, Disclosure, Risks and Returns be conducted. All the variables concerning ESG
such as ESG Risk adjusted returns, performance, disclosure, etc. cannot be studied in isolation as
there are numerous interpretations and causal relationships for and between each of these
terminologies. For example, ESG performance does not necessarily mean that they are properly
disclosed. Disclosure can imply more transparency leading to lesser idiosyncratic risks and
thereby, higher availability of ESG Funds at lesser costs of capital. This can in turn act as an

69
economic incentive for the firms to follow sustainability. Likewise, higher ESG performance can
also be correlated with equal or higher returns than their conventional counterparts. In
whatsoever manner, ESG disclosure tends to provide positive rather than negative outcomes.

5.2 Suggestions

The present study puts forth certain suggestions which could enhance the analysis of and the
trend in ESG compliance across the globe.
1. Standardisation of ESG Compliance and Methodology: The ESG scoring methodologies
are so diverse that there is inaccuracy and incomparability in the ESG data, challenging
the portfolio decision making process.
2. BRSR Compliance has to be specific and stringent: The BRSR mandated by SEBI is
apparently a checkbox compliance which is subjective rather than objective. Given BRSR
Reporting format, it is challenging for the firms to quantify the information on ESG
activities. Therefore, proper methodology has to be devised to aid the firms in
quantifying the qualitative data. This can reduce the asymmetricity in information
regarding the Indian companies.
3. Currently, the compliance reports are published annually. However, quarterly reports
could be indicative of the progress of the ESG activities and keep a check on the
companies’ operations. This could facilitate investors in their portfolio decision making
process in assessing the seasonal trends and risks associated with stocks as stock
exchanges are round-the-clock.
4. Researches based on the influence of ESG Disclosure should also consider the quality of
the disclosure in order to reduce imperfect information. Mere disclosure but weak
performances should not be considered at par with ESG stocks with higher performance
as the impact of the former might be overstated in reality. Moreover, stringent regulations
should be taken into account for greenwashing.

70
5.3 Conclusion

The paper aimed to analyse the role of ESG Funds as an economic incentive for businesses to
follow sustainable business practices by studying the three broad objectives. There is ample
literature to substantiate the argument of the paper that ESG Funds do play a crucial role as an
economic incentive to lure the business firms into being sustainable in their operations. This has
been observed across the analysis of all the objectives.
Beginning with the global scenario, the meta-analysis is dominated by findings of
positive correlation between ESG and Financial performance. This has been backed by the
empirical findings of the Indian companies which showcases mixed results with a positive
finding predominating the relationship between ESG performance and EPS values of the firms.
Further, it is proven to enhance the performance of the stocks in the medium or long run rather
than in the short run. Besides mere disclosure, theme-specific strategies like decarbonisation
evinced better financial metrics. These findings suggest that firms will be attracted to ESG for
the sake of enhanced financial performance. Moreover, ESG investing has other positive
externalities such as downside protection and lower volatility, particularly, downside risks during
crises, resulting from increased transparency of non-financial disclosure. Mere disclosure
irrespective of the range of ESG Scores leads to a reduction in the idiosyncratic risks.
Correspondingly, both the investors and the firms would benefit from higher risk-adjusted
returns through ESG integration. In fact, the ESG Stocks have proven to yield returns at par with
or greater than their conventional counterparts while simultaneously lowering the median stock
return volatility and enhancing the efficiency ,thereby acting as an economic incentive for the
firms to engage in ESG activities. Additionally, ESG disclosure and transparency helps in
reducing the information asymmetry in the market, capital constraints and reputational risks
related to the stocks, accelerating the availability of capital at lesser costs. In any case, ESG non-
compliance or non-disclosure is at the cost of ESG Funds. Therefore, the businesses tend to
operate and implement ESG-focused activities, thereby gaining economically. Hence, the study
concludes that ESG plays an integral role as an economic incentive for the businesses to follow
sustainable business practices and be ESG compliant.

71
 The study extends scope for further research in the analysis of the ESG-Financial
performance relationship in Indian companies by incorporating more financial metrics, inclusive
of time lags in assessing the actual impact of ESG on Financial Performances. There’s wider
scope for extensive research with regard to the influence of cost of ESG Compliance on the ESG
investment supply. Given the voluntariness of ESG Disclosure and the cost of ESG compliance,
the effectiveness of ESG Disclosure can be another area of research that can stem from the
present study.

72
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CRISIL ESG Score 2022

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 ANNEXURE
CRISIL ESG Score 2022 Assorted Tables

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