Screening activity matters: Evidence from social and governance portfolio performance from an emerging market

Socially Responsible Investments (SRI) have recently generated much interest among asset owners, managers and academicians. Though the Efficient Market Theory suggests that stock prices fully reflect all available information, few existing studies indicate that Environmental, Social and Governance (ESG) portfolios deliver superior risk-adjusted performance. ESG investing is at a nascent stage in India but is growing rapidly, especially after the COVID-19 pandemic. Asset managers always face the dilemma of choosing between different screening methods, screening intensities and stock weighting schemes to deliver outperformance. Our study attempts to investigate the impact of these portfolio construction criteria on the risk-adjusted performance of ESG portfolios in India. Our results show that there exists a trade-off between superior investment performance and unsystematic risk of ESG portfolios. Investors can benefit from investing in equally-weighted best-in-class portfolios constructed using ESG scores. We highlight the implications of our findings for asset owners, managers, index providers and regulators, and also provide directions for future research in the area of ESG portfolio management. © 2023 John Wiley & Sons Ltd.

Did ESG Save the Day? Evidence From India During the COVID-19 Crisis

Investors have shown increasing interest in Socially Responsible Investments (SRI) in the past few years, especially during the financial crisis caused due to the outbreak of the COVID-19 pandemic. SRI are evaluated on the basis of Environmental, Social and Governance (ESG) criteria. ESG information allows investors to assess the risks associated with a particular firm and how the firm manages or intends to manage future risks. Amidst the increasing investor interest in ESG products, we attempt to study the value addition of ESG performance to investors during crisis period. Using a sample of ESG rated firms listed on the Bombay Stock Exchange (BSE), we examine the investment performance, trading volumes and return volatility of ESG stocks in an emerging market like India during the COVID-19 crisis. The results of our event study conducted around the important events that have occurred in India during the COVID-19 pandemic provide evidence that investors can use ESG information as a signal of future stock performance. Most importantly, ESG performance provides downside protection during crisis times. Our results show that ESG performance does not prove to be detrimental to investment performance during normal times. Also, ESG performance was found to reduce stock return volatility during the COVID-19 pandemic. Overall, our study attempts to establish an investment case for ESG stocks in emerging markets in India by providing support to the good management hypothesis.