Analysis of ESG impacts on investment returns of industries in India

Abstract

This study investigates the relationship between Environmental, Social, and Governance (ESG) performance and financial metrics, specifically Return on Capital Employed (ROCE) and stock returns, across various industry sectors. Three hypotheses were formulated and tested using regression models. The first hypothesis posited a positive relationship between ESG performance and profitability (ROCE). Contrary to expectations, the data revealed a consistent negative relationship. This suggests that companies with higher ESG ratings may experience reduced profitability in the short term, possibly due to the upfront costs associated with ESG initiatives. The second hypothesis proposed a positive relationship between ESG performance and stock returns. The data supported this hypothesis, indicating that companies with higher ESG ratings are associated with higher stock prices. This suggests that the market rewards firms with strong ESG performance, possibly reflecting investor preference for sustainable and responsible business practices. The third hypothesis examined sectoral differences in the relationship between ESG performance and financial metrics. The data showed significant variability across sectors, particularly in how they relate to ROCE and ESG performance. This supports the notion that industry-specific factors may mediate the relationship between ESG ratings and financial performance. Overall, the study provides nuanced insights into the complex relationship between ESG performance and financial outcomes. While ESG initiatives may compress profitability in the short term, they appear to positively influence stock prices. Additionally, the impact of ESG performance on financial metrics varies across sectors, suggesting the need for industry specific ESG strategies.