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Asian Journal of Multidisciplinary Studies ISSN: 2321-8819 (Online)

Volume 2, Issue 11, November 2014 2348-7186 (Print)
Impact Factor: 0.923

ESG index is Good for Socially Responsible Investor in India

M.M. Goyal1 and Khushboo Aggarwal2
1
O.S.D-Principal, PGDAV College, Ring Road, Nehru Nagar, New Delhi – 110065 India.
2
Assistant Professor, PGDAV College, Department of Commerce, Ring Road,
Nehru Nagar, New Delhi – 110065,
Abstract At present time sustainable development is a most concerning phenomenon in almost all
parts of the world, mostly in developing countries like India and China. Since almost every
country is facing the sustainability challenges distressed with environmental, social, governance
and financial crisis, sustainable development has become a universal goal. This paper examines
whether ESG(Environment Socially Governance)stocks portfolio (represented by S&P ESG)
outperforms the blue chip stocks portfolios and the market portfolio in the Indian stock market, by
using absolute rate of return and the risk adjusted measures viz Sharpe ratio and Treynor ratio,
Jensen ratio and the CAPM. During the period 30 th jan2008 to 30th September 2013, we find that
ESG stocks portfolios has outperformed the blue chip and market portfolios .ESG stocks
portfolios is found to be highly correlated with blue chip and market portfolios in India stock
market. By Using absolute rate of return we find that the ESG stocks portfolio generated higher
return than the blue chip and the market portfolio. Monthly mean return on ESG stocks portfolios
is found to be higher than the other two stocks portfolios though not significant. Using risk
adjusted measures – Sharpe ratio and Treynor and Jensen ratio, we find that ESG stocks portfolio
outperform the market. Moreover, ESG stocks portfolio is most aggressive portfolio as it is found
to have high systematic risk and the total risk than the other two portfolios. Further regression
results shows that high ESG stocks portfolio is providing higher abnormal returns as compared to
blue chip stocks portfolio and market portfolio. Daily results are also found to be consistent with
the monthly returns. The findings have important implications for the investors who are socially
responsible as they can start investing in such stocks to reap higher return as compared to that of
the market.
Keywords: S&P ESG Index, Socially responsible investing, Environment, Performance Evaluation
JEL CLASSIFICATION: G11, F64, Q56
I: Introduction from profit maximization goals to long term
sustainable goals.
In the past few years socially responsible investing,
environmental, social and governance investing has Formation of new policies and disclosure norms
gain a momentum among the Institutional and and development of various indices all across the
Retail investors in India.ESG is a wider concept as globe like S&P ESG index, S&P Greenex,
it stands for three different parameters ESI(Environment Sustainability Index)
Environmental, Social and Governance. ,EPI(Environment Performance index),GRI(Global
Environmental criteria measures the company’s reporting Initiative) show the growing concern and
energy use, waste, pollution, natural resource move towards socially responsible investing.
conservation and animal treatment, Social criteria Though this phenomenon has gained importance in
measures the company’s relationship with developed countries but in developing countries it
suppliers, stakeholders interest and employees is gaining momentum. In India Development of
health and safety measures. Governance criteria S&P Greenex,S&P ESG index as well New
measures the company’s accounting methods and Companies Act 2013 which made it mandatory for
board structure. every company, private or public limited having
net worth of Rs.500 cr. or a turnover of R.1000 cr.
At present time sustainable development is a most
or net profit of Rs.5 cr. to spend at least 2% of its
concerning phenomenon in almost all parts of the
average net profit for the immediately three
world, mostly in developing countries like India,
preceding financial years on CSR activities.
China etc. Since almost every country is facing the
sustainability challenges distressed with Evaluation of ESG performance has been the realm
environmental, social, governance and financial of socially responsible investors (SRIs) who
crisis, therefore sustainable development has endeavour to align financial activities with social
become a universal goal. Since there is growing and environmental objectives, values, or beliefs. In
evidence that ESG factors when merged with order to provide complete disclosure and
investment analysis and decision making can transparency to the socially responsible investors in
provide potentially long term performance benefits India. S&P Dow Jones Indices, CRISIL, and KLD
to the investors, companies have started moving developed an index S&P ESG Index on 30 Jan
2008 that represents environmental, social, and

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ESG index is Good for Socially Responsible Investor in India

corporate governing (ESG) practices which based whether ethical screening has an impact on
on quantitative factors against the subjective portfolio performance. The study finds that social
factors. The Index consists of 50 Indian screening have little impact on portfolio
companies that meet the certain ESG criteria and performance as compared to environmental
have been extracted from the largest 500 performance.
companies which are listed on the National Stock
Mahapatra(1984) empirically investigated
Exchanges.
investor’s reaction to the pollution control
The objective of the paper is to empirically expenditure and the accounting of corporate social
examine the relative performance of ESG responsibility performance. The study finds that the
(Environment Socially Governance) stock pollution control expenditure has a negative impact
portfolios vis-a-vis Market portfolios. Using Daily on the financial performance of US companies in
and Monthly data on ESG, Blue chip companies 1970.
and Market index for the period 30 Jan 2008 to 30 Dunn(2009) in his study investigated the impact of
September 2013,this study finds that the ESG ESG issues with respect to their role in investment
stocks portfolios outperformed the other portfolios decisions. The study finds that that decreased costs
and provided better investment opportunities to through removal of environmental inefficiencies
socially responsible investors in India. may lead to increased firms earnings and higher
returns.
The rest of this study is organized in the following
way. Section 2 brief about the background and Derwall et.al (2005) in their study investigated
literature review Section 3 describes details about whether the socially responsible investing
the data collection and methodology of the study (SRI) leads to inferior or superior portfolio
Section 4 discusses the empirical results, while performance. The study finds that the high
Section 5 provides the conclusion. environmental rating stocks portfolios provided
substantially higher average return than those of
II. Literature Review
stocks with low ratings.
Bhanumurthy (2007) in his paper argued that
Kadyan and Aggarwal(2014) in their study
business ethics and social responsibility are not
investigated the impact of corporate social
unrelated. He emphasis on the need to differentiate
performance on its economic performance in of the
between business philosophy and philosophy of
top 50 companies listed on NSE.The study finds
business. It argues that there is a paradigm shift in
that environmental rating has positive association
the philosophy of business. This shift leads to a
with P/E ratio and ROA and negative with EPS
framework wherein a new perspective on business
though not significant.
ethics and social responsibility emerges. It is
coined as Corporate Responsibility. It consists of Cohen et.al (1997) in their study examined the
(a) good governance (b) corporate social performance of two industry balanced portfolios-
responsibility (“CSR”) (c) environmental high polluters and low polluters by comparing their
accountability. The gap between business and market and portfolios return. The study finds that
society has declined drastically. Further he there is no penalty for investing in green portfolios
emphasises that Social responsibility, as it gives positive returns.
environmental accountability and governance must
Scheuth(2003) in his study finds that SRI in U.S
be brought under one umbrella of business ethics.
has emerged as a dynamic and rapidly growing
segment .The socially responsible investment
Boulatoff and Boyer (2009) in their study industry in the United States is new and growing
investigated 310 green firms and found that green phenomenon.
company’s financial performance is dependent on
Erfle & Fratantuano (1992) in their study finds that
that of traditional company’s performance. They
there is a positive and significant relationship
further found that green firms have larger R&D and
between firm’s financial and environmental
capital expenditures compared and better corporate
performance.
governance than NASDAQ firms.
III: Data and Methodology
Tripathi and Bhandari (2012) in their paper
empirically examined the performance of Green The Present study evaluates the performance of
stocks portfolios vis-a-vis market portfolio from three portfolios (viz: ESG stocks portfolio, Blue
2000-2012 using absolute and relative performance chip stocks portfolio, and Market portfolio) over
measure. The study finds that the green is good for the period 2008 to 2013. S&P ESG India index is
the India stock market as it outperformed the comprised of the Indian companies with the highest
market and other stocks portfolios on various score in terms of environmental, social and
occasions. corporate governance responsibility. This index
includes 50 stocks from the pool of top 500 Indian
Diltz (1995) in his study examined twenty-eight
companies, by total market capitalization, listed on
common stock portfolios over the period January 1,
the National Stock Exchange of India Ltd. (NSE).
1989–December 31, 1991 in order to determine

Asian Journal of Multidisciplinary Studies, 2(11) November, 2014 93

ESG index is Good for Socially Responsible Investor in India

A more comprehensive and broad based NSE 500 b. Treynor ratio: It is measured as the
INDEX is used as the proxy for market portfolio. excess return per unit of portfolio
systematic risk, represented by portfolio
Daily and Monthly closing adjusted share prices of
beta (βP). Treynor index uses the
the respective index during the period 30 th Jan 2008
portfolio’s beta, which assumes the
to 30th September 2013 are collected from
portfolio is well diversified. It
Bloomberg and National Stock Exchange of India
standardizes the return in excess of the
Ltd. The share prices are converted into simple
risk-free rate by the volatility of the return.
percentage returns as (Pt–Pt-1)/Pt-1 and the total
return over the period is calculated. The risk free Treynor ratio = (ARP - RF)/βP
rate is calculated as the daily average implicit yield (2)
on 91 days T-bills over the study period. Next Karl
c. Jensen Measure: Similar to the Treynor
Pearson’s coefficient of correlation is calculated
measure, the Jensen measure is based on
among these portfolios, portfolio beta and the
the capital assets pricing model. It reflects
following risk adjusted measures for performance
the difference between the return which is
evaluation.
actually earned on a portfolio and the
a. Sharpe ratio: It is measured as the excess return the portfolio was supposed to earn,
return per unit of total portfolio risk. given its beta as per the capital asset
Sharpe ratio uses standard deviation as a pricing model. Thus the Jensen measure
measure of risk and it does not assume the is:
portfolio is well diversified. The index
standardizes the returns in excess of the Jensen ratio= ARP – (RF+ βP(ARm - RF))
risk free rate by the variability of the (3)
return. It is also known as Reward to
Variability ratio. If ARP is the average A positive alpha is a good indicator of portfolio
daily portfolio return, RF the daily risk performance whereas the negative alpha is a bad
free return and P portfolio total risk then indicator. Further, we have used CAPM to compare
Sharpe ratio can be calculated as- the expected return on each of the portfolios with
its return predicted by CAPM.T-test is also used to
Sharpe ratio = (ARP - RF)/ P
check whether the mean returns of the portfolios
(1) are significantly different or not.

Table:1 The operational definitions of different portfolios used in the study are provided in table 1

S.No. PORTFOLIOS OPERATIONAL DEFINITION

1. ESG Stocks Portfolios Portfolio of 50 stocks from the Pool of top 500
companies having highest score in terms of
environmental, social and corporate
governance responsibility names as S&P ESG INDEX.
2. Blue chip stocks portfolio Portfolio of Stocks of leading and nationally known
companies that offer a record of continuous dividend
payments and other strong investment qualities listed
on NSE names as S&P CNX NIFTY.
3. Market portfolio Widely diversified portfolio listed on NSE as S&P
CNX 500

IV: Empirical Results is 0.46% as compare to 0.36% of the market

portfolio return.
Table 2, 3, 4 ,5 and 6 shows the results of our
study. Table 2 shows the results of Karl Pearson’s ESG stocks portfolio has a high risk of 8.97% as
coefficients of correlation between the different compared to Blue chip stocks and market stocks
portfolios. It shows that ESG stocks portfolios have portfolio which is 7.76% and 8.39% respectively
a higher degree of correlation with blue chip but the coefficient of variation is lowest in ESG
portfolios as compare to the market. Table 3 shows stocks portfolio i.e. 9.41% as compare to the other
portfolio return, total risk (standard deviation), two portfolios. Beta of ESG stocks portfolio is
coefficient of variation, beta, Sharpe ratio and highest among all the three portfolios making it
Treynor ratio of all three portfolios. It shows that more aggressive portfolio.
ESG stock portfolio and blue chip stocks portfolio
has provided significantly higher return than the The beta of high dividend stock portfolio is lowest
market. Monthly average return on ESG stock (.885), highlighting the fact that it is the most
portfolio is 0.95% and on blue chip stock portfolio conservative portfolio among the three portfolio
and consists of the lowest amount of systematic
risk. During the study ESG stock portfolio has

Asian Journal of Multidisciplinary Studies, 2(11) November, 2014 94

ESG index is Good for Socially Responsible Investor in India

outperformed the market and blue chip stock returns are significantly different or not. We find
portfolios. that during the study period, ESG stocks portfolio
generated higher return than blue chip and market
Table 4 shows the regression results. It shows that portfolio although the differences are not
ESG stocks portfolio is providing higher abnormal statistically significant.
returns as compare to blue chip stocks portfolios.
Table 6 shows the daily return where it is found
Table 5 shows the result of t- test to check whether that the daily return are consistent with the monthly
monthly average returns of ESG stocks portfolios, return .Overall the ESG stocks portfolio is
blue chip stocks portfolios and market portfolios outperforming the blue chip and market portfolio.

Table: 2 Cross correlation matrix of different portfolios returns

PORTFOLIOS Blue chip Market

ESG Stocks Portfolio .962** .980**
Blue chip(NIFTY) 1 .988**
Market(NSE500) 1
** Significant at 1% level

Table: 3 Return, Risk, Sharpe Ratios and Treynor and Jensen Ratios of Portfolios (Monthly Returns)

Portfolios Average Standard Coeff of Beta Sharpe Treynor Jensen

(%) deviation variation ratio ratio ratio
(%)
ESG Stocks 0.95 8.97 9.41 1.04 0.04 0.37 0.6
Portfolio
Blue chip 0.46 7.76 16.82 0.91 -0.01 -0.12 0.08
(NIFTY)
Market 0.36 8.39 23.28 0.99 -0.02 -0.21 0
(NSE500)
Table: 4 Regression Results

Portfolios Alpha t(Alpha) Beta t(Beta)

ESG Stocks 0.60 2.77 1.05 40.32
Portfolio
Blue chip 0.08 0.570 0.91 53.08

We have examined the abnormal return using the capital asset pricing model by the following equation

(Rp-Rf) = α+β(Rm-Rf) (4)

Where Rp is return on portfolio, Rf is the risk free rate, Rm is return on the market.

Table: 5 Result of T-Test

Pairs Mean difference T value

ESG Index & Blue chip 0.492 0.343

ESG Index& Market 0.593 0.398

Blue chip & Market 0.100 0.073

Table: 6 Return, Risk, Sharpe Ratios and Treynor and Jensen Ratios of Portfolios (Daily Returns)

Portfolios Average Standard Coeff of Beta Sharpe Treynor Jensen

(%) deviation variation ratio ratio ratio

Asian Journal of Multidisciplinary Studies, 2(11) November, 2014 95

ESG index is Good for Socially Responsible Investor in India

(%)
ESG Stocks 0.045 1.873 41.314 0.962 0.014 0.028 0.031
Portfolio

Blue chip 0.022 1.704 76.155 1.038 0.002 0.003 0.009

(NIFTY)

Market(NSE 0.014 1.168 117.602 1 -0.003 -0.005 0

500)
V: Conclusions and Implications other two stocks portfolios though not significant.
Using risk adjusted measures – Sharpe ratio and
In the past few years socially responsible investing,
Treynor and Jensen ratio, we find that ESG stocks
environmental, social and governance investing has
portfolio outperform the market. Daily return
gain a momentum among the Institutional and
results are also found to be consistent with the
Retail investors in India.ESG is a wider concept as
monthly return .Overall the ESG stocks portfolio is
it stands for three different parameters
outperforming the blue chip and market portfolio.
Environmental, Social and Governance. In the
Moreover, ESG stocks portfolio is most aggressive
current study we have analysed the performance of
portfolio as it is found to have higher systematic
ESG stocks portfolios vis-a-vis market
risk as well as total risk than the other two
portfolios.ESG stocks portfolios is found to be
portfolios .Further regression results shows that
highly correlated with blue chip and market
ESG stocks portfolio is providing higher abnormal
portfolios in India stock market. Using absolute
returns as compared to market portfolio. The
rate of return we find that ESG stocks portfolio
findings have important implications for the
generated higher return than the blue chip and the
investors who are socially responsible as they can
market portfolio. Monthly mean return on ESG
start investing in such stocks to reap higher return
stocks portfolios is found to be higher than the
as compare to that of the market.
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