DO HIGHER ESG SCORES LEAD TO BETTER STOCK RETURNS? AN ANALYSIS OF 30 COMPANIES IN THE NIFTY 100 ESG INDEX

Abstract

This research paper explores the connection between ESG (Environmental, Social, and Governance) scores and financial performance in the context of Indian capital markets, focusing on 30 companies listed in the NIFTY100 ESG Index between 2020 and 2023. The study was driven by a central question: Do higher ESG scores lead to better stock returns? With the rise of sustainable and responsible investing globally, Indian investors and corporates are increasingly aligning with ESG principles, but there remains uncertainty about whether such alignment offers real financial advantages. Using a combination of ESG scores, controversy levels, ESG risk classifications, and annual stock return and volatility data, the study attempts to empirically answer this question for Indian large-cap companies. The results show that the connection between ESG performance and stock returns is complex instead of direct. High ESG-rated companies did not always yield the highest financial returns. For example, Tata Steel and Tata Motors, which had low or even mediocre ESG scores, had some of the highest returns in the sample, although they also had high volatility. On the other hand, NTPC, Siemens, and Coal India were top performers on ESG indicators and provided good, stable returns, in accordance with the theory that good ESG performance underpins long-term resilience. Notably, the research established a moderate negative correlation between ESG scores and volatility, indicating that firms with superior ESG practices have more stable stock prices. This is in line with the argument that ESG is less of a return enhancer and more of a risk management tool. Firms such as Nestlé India, Sun Pharma, and Hindustan Unilever followed this by delivering modest but reliable returns with low volatility and high ESG scores, which will appeal to risk-averse investors who are interested in long- term investment. The research also explores qualitative ESG aspects like controversy scores and ESG risk ratings. Firms with high controversy scores or extreme ESG risk ratings like Reliance Industries and Coal India tended to still perform well on returns but exhibited greater volatility and reputational risk. Conversely, low controversy companies with vi low ESG risk, such as TCS and Bajaj Auto, provided less predictable performance while reiterating that controversy and risk categories might be valuable flags for investors concerned about long-term stability and issues related to governance.By examining the three ESG pillars separately, the research noted that most companies had uneven scores, doing well in one pillar but poor in another. For instance, IT companies were likely to do poorly on environmental aspects but have robust governance systems. This underlines the need for investors to move beyond the general ESG score and examine the specifics of each ESG pillar to make well-informed choices.