Angels or Sinners? Exploring the Halo Effect in ESG Investing in Indian Equities

Abstract

Environmental, social, and governance (ESG) are key focus areas in both global and Indian contexts. However, studies have yet to definitively establish their direct influence on financial returns for investors in the Indian equity market. This study examines the impact of ESG scores on portfolio performance, risk, market valuation, and factor exposures using historical data from Indian firms (2013–2023). Portfolio performance and risk characteristics were evaluated through portfolio analysis, while valuation and factor exposures were examined using Fama-MacBeth regressions and the Fama-French 5-factor plus momentum model. The findings reveal that higher ESG scores do not consistently improve portfolio returns, but exhibit marginally better downside risk characteristics in equal-weighted portfolios. The market does not consistently reward high ESG portfolios with valuation premiums. Although aligned with the profitability factor, high-ESG portfolios show limited exposure to other Fama-French factors. These findings are relevant for institutional investors and corporate stakeholders in India looking to integrate ESG considerations into strategic decisions and investment frameworks and emphasise the market-specific dynamics of ESG integration.

Keywords: ESG, ESG Investing, Factors, Portfolio Construction, Indian Equity

JEL Classification: G00, G11, G14