Is Socially Responsible Investments the Way Forward for Investors Seeking Sustainable Development and Returns? Evidence from India

Concerns about Socially Responsible Investments or Environment, Social, and Governance (ESG) Investments have recently gained momentum among investors, policymakers and other sections of society worldwide. Investors seek to determine whether ESG investments can provide both financial returns and sustainable development. The authors’ goal in this research is to analyse how ESG ratings affect the performance of various portfolios. The authors have evaluated eight different portfolios using the Fama-French five-factor model: TOPESG, BOTTOMESG, TOP ENV, BOTTOMENV, TOPSOC, BOTTOMSOC, TOPGOV, and BOTTOMGOV. In order to undertake the study, data related to Nifty500 companies was extracted from the Bloomberg terminal and prowess database and analysed using R software. Findings reveal portfolios having a negative baseline performance, with most portfolios showing negative intercepts, suggesting the presence of additional, unidentified factors negatively impacting returns. This indicates that the risk-adjusted returns of these portfolios are unaffected by ESG scores. On the other hand, portfolios that prioritised governance had positive intercepts, suggesting that they performed well to begin with. This implies that governance score significantly impacts the risk adjusted returns of governance focused portfolios. Thus, the portfolios focusing on governance, underscore the importance of strong governance practices in promoting financial stability, social trust, and corporate and social responsibility.