ESG, The Ethical Enigma Of The Money-Minded

Prof. Sajal Ghosh, Professor of Economics & Public Policy, MDI Gurgaon

The past decade has witnessed a monumental surge towards sustainable investment practices worldwide, driven by a collective push to meet environmental, social, and governance (ESG) standards across industries. Key global initiatives such as the "Fossil Fuel Divestment Movement," which pledged a divestment of assets totalling over $39.2 trillion, and the "Net Zero" commitment in COP26 have accentuated the growing momentum towards sustainability, with a significant reliance on corporate actions.

Amidst ongoing sustainability efforts, the COVID-19 pandemic has further amplified the focus on ESG con- siderations. Financial institutions are increasingly prioritizing sustainability, compelling corporations to integrate ESG criteria into their strategies. Consequently, a new category of investment has risen, called ESG stocks, re- presenting corporations paying attention to sustainability and the environment, along with their bottom lines. A substantial portion of investment has flowed into these ESG stocks in recent years, elevating them to a significant position within global equity portfolios. ESG has also emerged as a noteworthy asset class, attracting considerable attention from researchers worldwide. Amidst these developments, a crucial question arises: Do investors truly value sustainability-related information? Does this information influence investors' beliefs and attitudes towards companies that adhere to ESG principles for the betterment of society?

A recent paper titled "Does investor sentiment influence ESG stock performance? Evidence from India," published in the Journal of Behavioral and Experimental Finance, sheds light on this pertinent issue. The research is conducted by research scholars Samriddhi Dhasmana and Professor Sajal Ghosh from Management Development Institute Gurgaon, along with Professor Kakali Kanjilal from International Management Institute New Delhi.

The research designs an investor sentiment index that represents the market activities of major corporates in the financial market, to explore if the thrust for ESG performance of corporates is linked with this market-oriented investor sentiment. An ESG Index reflects the ESG initiatives of major financial market participants of a country. For example, the Nifty 100 ESG Index is derived from the NIFTY 100 Index companies.

The study uses market-based indicators of firms’ activities like performance, liquidity, financing activities, options trading, trading activity and enthusiasm, evolving over time to develop a sentiment index. These indicators are adjusted to remove the confounding effects of macroeconomic fundamentals like economic activity, inflation, interest rates, term spreads, exchange rates, and foreign institutional investments. Thus, the derived sentiment index represents the market activities of major corporates in the Indian financial market which was then compared with the MSCI ESG index and the NSE ESG index, respectively.

India is the world's third-largest energy consumer and carbon emitter. Despite India's commitment to sustainability, including ambitious targets to reduce carbon intensity and increase renewable energy capacity, the study found no evidence suggesting that investor sentiment influences ESG stock returns. In fact, the research suggests the opposite: an increase in ESG stock returns weakens investor sentiment. These findings imply that investors remain indifferent to ESG initiatives undertaken by companies, instead prioritizing traditional monetary benefits.

This revelation poses a significant challenge to the purpose of ESG reporting and highlights the need to reassess ESG policies and approaches. The study suggests that investors may be reluctant to fully embrace ESG initiatives due to concerns about compromising profit motives and skepticism about dishonest claims. It hinted at a lack of investors’ trust, either in the ESG reporting by the corporations or the regulators, leading them to believe these ESG initiatives to be either ineffectual, concealing, or superficial. Moreover, the study highlights the detrimental impact of "greenwashing," which undermines genuine corporate efforts towards sustainability and erodes trust among stakeholders.

The findings emphasize the responsibility of regulators and sustainability advocates to motivate profit-driven corporations to integrate ESG initiatives, promote transparent ESG accounting practices, and combat greenwashing. Additionally, there is a pressing need to communicate the significance of these efforts to investors to foster a more sustainable investment landscape.

The outcomes of the study did show a silver lining. ESG efforts may not make people feel good right away, but they do have a positive effect on investors over time. This makes people hopeful that the ESG index will be able to attract socially sensible investors if the companies keep trying to be more environmentally friendly.

In conclusion, the study serves as a timely reminder of the challenges and opportunities inherent in advancing sustainability within the Indian market. The regulators have been continuously trying to upgrade the policies to encourage more companies to come under the ESG umbrella. The prior voluntary option to disclose their sustainability efforts through a Business Responsibility Report has now been mandated by the SEBI to disclose ESG through the Business Responsibility and Sustainability Report from FY 2022–23. The recent ESG rating and scoring approvals by SEBI to ICRA, SES ESG, and Crisil indicate the regulators efforts to engage and motivate investors’ trust in ESG reports, urging stakeholders to redouble their efforts towards fostering a more sustainable and responsible investment ecosystem.

Adapted from a research paper - Does investor sentiment influence ESG stock performance? Evidence from India

Author - Prof. Sajal Ghosh, Professor of Economics & Public Policy, MDI Gurgaon

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