SUSTAINABLE INVESTMENTS AND INVESTMENT PERFORMANCE: AN EMPIRICAL STUDY FROM INVESTORS’ PERSPECTIVE

Abstract

The global spotlight on sustainability, ethical governance, and responsible corporate practices has led to an increased interest in integrating Environmental, Social, and Governance (ESG) into investment decisions. This thesis investigates the performance and implications of ESG-based investments, particularly within the Indian market, aiming to explore how ESG criteria influence financial outcomes and asset managers‘ investment strategies. Given the growing interest in sustainable investing worldwide, the study is critical, especially in emerging markets like India. The rationale behind this study stems from the urgent global challenges that require immediate attention, including climate change, social inequality, unethical corporate practices, and environmental degradation. Further, ESG investing, also known as sustainable or responsible investing, has gained considerable traction, particularly in developed economies such as the USA, the European Union, and Japan. However, its adoption in India remains nascent. Three primary objectives drive this study. The first objective was to assess the impact of ESG on shareholder wealth, using Tobin‘s Q as a proxy to measure the wealth of shareholders in companies listed on the Nifty 500 index. This involved a comprehensive analysis of ESG scores of firms spanning the period from 2015 to 2022, with ESG scores extracted from Bloomberg and financial data from Prowess. The study also examined whether innovation moderates the relationship between ESG and shareholders' wealth. Fixed Effects Panel Data regression was employed to analyse the relationship between ESG scores and shareholder wealth. Tobin‘s Q was the dependent variable, while the independent variables included combined ESG scores and their individual components (E, S, and G). Four models were tested to determine whether environmental, social, and governance scores were significantly associated with shareholders' wealth. The second objective was to analyse the performance of ESG-based portfolios to determine whether ESG investments yield competitive returns compared to traditional investments. These portfolios were created based on ESG scores. The top 10% of total v firms based on ESG scores had a separate portfolio, and similarly, the Bottom 10% consisted of firms with the lowest ESG scores. Based on this, the study assessed a total of eight portfolios - TOPESG, BOTTOMESG, TOP ENV, BOTTOMENV, TOPSOC, BOTTOMSOC, TOPGOV, and BOTTOMGOV. Out of 500 firms in the Nifty 500, only 278 had ESG scores from Bloomberg Terminal; therefore, each portfolio consisted of twenty-eight firms. After the construction of these portfolios, they were assessed using the Fama-French five-factor model to assess the performance of these portfolios. In the Fama-French five-factor model, portfolios are assessed based on five factors: market risk premium, size, value, profitability, and investment. This assessment allowed for a nuanced examination of how ESG interact with traditional risk factors (such as market risk and value risk) in explaining portfolio returns. The third objective was to evaluate the role of ESG in shaping the investment decisions of asset managers in India and whether professional experience moderates this relationship. A structured questionnaire was designed and distributed to asset managers across India, resulting in 41 responses. The data collected was analysed using Smart PLS 4.0, with a focus the influence of environmental, social, and governance factors on investment decisions, as well as the moderating role of professional experience in shaping these decisions. The findings of this study offer valuable insights into the current state of ESG investing in India. The findings from the first objective revealed that there was no statistically significant relationship between overall ESG scores and shareholder wealth. Similarly, the individual environmental and social scores did not show a significant association with shareholders‘ wealth. In contrast, the Governance score had a significant positive impact on shareholders‘ wealth, indicating that investors highly value strong corporate governance practices. Companies with robust governance mechanisms—such as transparency, accountability, and effective risk management—tend to inspire greater investor confidence, which in turn positively impacts their market valuation. This emphasises the significance of governance as a fundamental component of ESG and accentuates the necessity for Indian corporations to enhance their governance frameworks in order to attract more ESG-conscious vi investors. These findings suggest that ESG, particularly environmental and social aspects, are not yet fully integrated into investment strategies in India. One possible explanation is that Indian investors and asset managers may not be sufficiently aware of the financial benefits of ESG integration. Alternatively, they may be deterred by the perceived costs and risks associated with implementing sustainable practices, especially in a developing economy like India. The second objective, which focused on the assessment of portfolios based on ESG, provided additional insights into the potential of ESG investing. The study revealed that the governance-based portfolios (TOPGOV) demonstrated positive alpha, suggesting that governance-focused investments can deliver positive returns even after adjusting for market and value risks. In contrast, the environmental and social portfolios (TOPESG, BOTTOMESG, TOPENV, and TOPSOC) exhibited negative alpha, implying that there may be unexplained factors—beyond those captured by the traditional risk factors—that negatively affect returns. This highlights the complexity of ESG investing and the need for further research to uncover the underlying drivers of these returns. Furthermore, in the third objective, the study also investigated the impact of ESG on Asset managers‘ investment decisions. The findings were mixed, with environmental factors showing no significant impact on investment decisions, while social and governance factors were influential. Asset managers appear to prioritise companies with strong social and governance practices, likely due to the perceived stability and ethical integrity these practices bring to their investments. The role of professional experience was also significant, with more experienced asset managers emphasizing social and governance factors in their decision-making process. This suggests that professional experience enhances the ability to recognise the long-term value of sustainable practices, particularly in social responsibility and corporate governance. The implications of this study are significant for a variety of stakeholders. Policymakers can draw inferences from this study to focus on improving corporate governance standards and promoting greater transparency in ESG reporting. By doing so, they can create a more conducive environment for sustainable investing in India. For corporations, the research underscores the importance of strengthening governance practices to enhance investor confidence and attract more ESG-focused vii investments. The study also reinforces the significance of professional development and training in ESG for managers, as more experienced managers are more likely to make well-informed decisions regarding ESG integrations of ESG in investments. For investors, the findings suggest that while ESG investing—particularly in governance- related aspects—can deliver positive financial outcomes, there is still a need for greater awareness and integration of environmental and social factors into investment strategies. Investors should adopt a more comprehensive approach to ESG, recognizing that long-term value creation is likely to be enhanced by sustainable practices. This thesis contributes to the growing literature on ESG investing by providing a detailed analysis of the Indian market. While governance factors are already recognised for their positive financial impact, environmental and social factors require further integration into investment strategies. The findings emphasise the need for sector-specific and investor-specific research to better understand the role of ESG in different contexts. Future research should focus on methodological innovations, regulatory changes' impact, and behavioural factors' influence on ESG investment performance.