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The impact of environmental, social and governance score on shareholder

wealth: A new dimension in investment philosophy

Article · March 2023

DOI: 10.1016/j.clrc.2023.100101

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 Cleaner and Responsible Consumption 8 (2023) 100101

Contents lists available at ScienceDirect

Cleaner and Responsible Consumption

journal homepage: www.journals.elsevier.com/cleaner-and-responsible-consumption

The impact of environmental, social and governance score on shareholder

wealth: A new dimension in investment philosophy
Abhishek Parikh a, *, 1, Divya Kumari a, Maria Johann b, Dušan Mladenović c
a
Ganpat University, Faculty of Management Studies, VMPCMS, Ganpat Vidyanagar, 384012, India
b
Warsaw School of Economics, al. Niepodległości 162, 02-554, Warszawa, Poland
c
Masaryk University, Department of Corporate Economy, Faculty of Economics and Administration, Brno, Czech Republic

A R T I C L E I N F O A B S T R A C T

Keywords: Recently, there has been significant research on the environmental, social, and governance (ESG) aspects of
ESG wealth generation. Managers have tried to attract investors for sustainable growth by pushing for ESG in­
Sustainable investment vestments. This study attempts to determine the relationship between ESG scores on shareholders’ wealth and
Shareholder wealth
define possible selection criteria for future investments. Notably, there are funds and investment avenues that are
Return
India
specifically designed for ESG themes, urging toward sustainable wealth creation. However, investors’ focus re­
mains on their returns and wealth creation. In recent years, reporting ESG scores has become standard practice
for most rating agencies to report the financial health of companies. Thus, this study employs a linear regression
model to analyze the impact of ESG scores on the equity returns of 225 Indian companies. The results show
empirical evidence of the positive impact of the governance (G) factor on equity returns, while it reports the
negative impact of the environmental (E) factor on equity returns. Moreover, the impact of the social (S) factor is
found to be insignificant. Therefore, we conclude that financial motivations may be needed to trigger E− and S-
factor practices by companies. It is important for companies to be very conscious of their governance practices to
improve their shareholders’ wealth.

1. Introduction common denominator in attempts to attract new long-term-orientated

investors.
The COVID-19 pandemic has completely disrupted the world econ­ Reporting ESG scores has become a prerequisite for credit rating
omy, causing global stock markets to become extremely volatile agencies to assess the financial health of individual companies (CRISIL,
(Chowdhury et al., 2022). The economic slowdown owing to the 2022). Ashwin Kumar et al. (2016) stated that the integration of ESG
pandemic has brought about significant difficulties for investors in terms practices makes a company less vulnerable to its reputation and lowers
of sustaining their wealth. the volatility in profits. In essence, the ESG score serves as an insurance
According to the Global Sustainable Investment Alliance (GSIA, mechanism against harmful stocks and mitigates investor risks.
2014), ESG scores can remedy the information asymmetry in financial Despite the growing popularity of ESG indicators and ESG-bounded
markets. The ESG score includes scores for environmental, social, and investments (Bengtsson, 2008), the literature is silent regarding the
governmental factors of firms and can be defined as a “firm’s obligation relationship between ESG and investor returns. This is surprising given
to improve social welfare; and equitable and sustainable long-term that reporting ESG-relevant activities has been deemed mandatory by
wealth for stakeholders” (Mohammad and Wasiuzzaman, 2021). Lour­ the New Companies Act (2013), is perceived positively by risk-averse
enço and Branco (2013) argued that ESG is a critical impulse in socially investors, and is an additional indicator of a company’s financial sta­
responsible investments, especially in terms of long-lasting economic tus. ESG assists decision-makers and shortens the time needed to make
benefit. According to Johann (2022), it is a particularly significant in­ investment decisions (Gillan et al., 2021).
dicator during volatile times. Consequently, ESG has emerged as a The context of developing countries remains largely unexplored in

* Corresponding author.
E-mail addresses: [email protected] (A. Parikh), [email protected] (D. Kumari), [email protected] (M. Johann), dusan.mladenovic@
econ.muni.cz (D. Mladenović).
1
Current Address: A2/104, Mandar Apartment, Nr. Loyola Hall, Naranpura, Ahmedabad, Gujarat – 380,013, India.

https://doi.org/10.1016/j.clrc.2023.100101
Received 22 September 2022; Received in revised form 24 December 2022; Accepted 18 January 2023
Available online 28 January 2023
2666-7843/© 2023 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-
nc-nd/4.0/).
A. Parikh et al. Cleaner and Responsible Consumption 8 (2023) 100101

scientific terms when it comes to corporate social responsibility (CSR) implement policies addressing social needs and expectations. Different
framework and practices related to ESG factors (Hamidu et al., 2015). approaches to CSR have been taken over the years, including philan­
Therefore, to address these gaps in knowledge, this study aims to portray thropy, regulated CSR, and instrumental/strategic CSR (Hamidu et al.,
the importance of ESG factors to investors’ returns in the context of a 2015). Instrumental/strategic CSR is embedded into the business strat­
developing country. India provides an excellent opportunity to do this, egy and requires CSR orientation, sustainable management, reporting,
given that companies in the country are obligated to report activities philanthropic activities, certificates, and communication (Johann,
that are related to ESG factors. 2022). Moreover, collaboration with stakeholders is essential for sus­
India’s New Companies Act (2013) provides a legal framework and tainable production and consumption (Mishra et al., 2022).
motivation for faithful reporting of relevant activities. Drawing on ESG refers to how corporations integrate environmental, social, and
publicly available data in form of ESG reports from Yahoo Finance, governance issues into their business models (Gillan et al., 2021). In
ACCORD, and CRISIL (2021), we compute adjusted equity returns to practice, ESG strategy and reports are an inherent part of the corporate
assess the three-factor model (ESG). Moreover, we examine whether strategy of companies taking a socially responsible approach. The
ESG engagements lead to higher investors’ wealth in India. implementation of sustainable business models has become crucial for
We make three significant contributions to the CSR and ESG litera­ sustainable development (Bocken and Short, 2021) and a company’s
ture. First, we capture the context of a developing country (India) that financial results. Table 1 provides recent works regarding CSR and ESG’s
has been a global pioneer in legal requirements to report ESG scores. By effects on corporate financial performance (CFP).
observing this unique case, we contribute to the growing body of In the given context, it is not surprising that investors’ and corporate
knowledge on the domain of ESG. Second, by discovering that only the managers’ interest in CSR and ESG is increasing and ESG investments
governance score (G factor) leads to increased shareholder wealth we are gaining importance (Gillan et al., 2021). The number of companies
provide pioneering empirical-based insights into the background dy­ that issue sustainability/ESG reports has considerably increased over the
namics of ESG score. As somewhat expected, the social (S factor) and last few years (G&A, 2021, 2020a; 2020b). In addition, the Principles for
environmental (E factor) scores proved to have a negative influence on Responsible Investment (PRI) have been developed to support investors
shareholder returns. Last, by observing ESG, we contribute to a better by addressing ESG issues in investment practices, including environ­
understanding of the short-term dynamics of creating equity returns. mental issues such as sustainable commodities, biodiversity, and circu­
Given that investors are often interested in long-term prospects, our lar economies; social issues such as human rights, working conditions
findings present a solid base for further and more complex explorations. and modern slavery; governance issues such as tax fairness, responsible
However, our findings must be taken with caution given the observed political engagement, and executive pay (PRI, n.d.). The principles are
time and national context. designed to align investment practices with the UN Sustainable Devel­
The remainder of the paper is structured as follows: Section 2 pro­ opment Goals (SDGs) adopted by all UN Member States in 2015 (UN,
vides a literature review of related studies. Section 3 presents the data, 2015). Thus, with detailed guidance regarding responsible investment
data collection method, and models used in this study. Section 4 reports practices, it is easier to integrate ESG concerns into investment analysis
the analysis procedure and major results. Section 5 discusses the results and decision-making processes. Moreover, the growth of responsible
and explains the implications. Last, Section 6 states the conclusion of investment has had a significant impact on financing cleaner production
this study and suggests avenues for future research. methods and sustainable practices within organizations (Ortas et al.,
2013). Consequently, sustainable production may stimulate sustainable
2. Literature review consumption (Ülkü and Hsuan, 2017).
Investors today attach great importance to ESG investing for two
The concepts of CSR and ESG have been broadly discussed by re­ reasons. First, through ESG investing, ethical investment practices are
searchers in recent years. A growing interest in CSR and ESG strategies is actively promoted. Second, ESG investing enhances the performance of
due to their roles in company performance (Franco et al., 2020). There is a managed portfolio, thereby increasing returns while reducing portfolio
also evidence that CSR’s effect on financial results is rising in the long risk. Galbreath et al. (2014) reported that integrating sustainable in­
run (Theodoulidis et al., 2017). The CSR concept has developed greatly vestment with ESG factors is the fastest-growing and the most popular
since Bowen (1953) emphasized the obligation of companies to investment approach. Nair and Ladha, 2014 stated that while

Table 1
Overview of recent studies regarding the CSR/ESG’s effects on CFP (Source: Authors).
Authors Companies/industry/country Source Time Method Topic
period

Theodoulidis et al. 683 companies, tourism industry MSCI ESG, COMPUSTAT 2005–2014 panel regressions CSR, firm strategy and CFP
(2017)
Velte (2017) 412 companies listed on the Asset4 database of Thomson 2010–2014 correlation and regression ESG and CFP
German Prime Standard Reuters analysis
Landi and Sciarelli Italian firms listed on FTSE MIB Standard Ethics Agency on FTSE 2007–2015 panel data analysis ESG and CFP
(2018) MIB’s companies
Dalal and Thaker 65 Indian public limited NSE 100 ESG Index database 2015–2017 panel data regression ESG and CFP
(2019) companies analysis
Franco et al. (2020) 178 companies, the hospitality Thomson Reuters Eikon database 2012–2017 panel data analysis CSR, quality management and CFP
industry
Ahmad et al. (2021) 351 UK companies FTSE350 UK firms 2002–2018 static and dynamic panel ESG and CFP, firm size as a
data techniques moderator
El Khoury et al. 46 listed banks, MENAT Refinitiv and World Bank 2007–2019 panel regression ESG and CFP
(2021) countries statistics
Rossi et al. (2021) 225 European listed companies Thomson Reuters ASSET4 2015–2019 linear regressions with CSR and CFP, board as a moderator
database panel data
Yilmaz (2021) non-financial companies, BRICS Sustainalytics database 2014–2018 panel regression corporate sustainability and CFP
countries
Zhou et al. (2022) 167 Chinese listed companies SynTao Green Finance 2014–2019 linear regression ESG, CFP and company market
value, CFP as a mediator

2
A. Parikh et al. Cleaner and Responsible Consumption 8 (2023) 100101

sustainable investment has grown considerably in America, Australia, of developed economies, a plethora of research has been carried out to
and Europe, the growth has been slowing in some emerging economies. understand the impact of ESG reporting on returns. Verheyden, Eccles,
However, as per a report published by India’s top credit rating agency, and Feiner (2016) demonstrated the effect of ESG on risk-adjusted
ESG-focused funds have become attractive for several big investors, such returns for shareholders using data from 23 developed countries. Bat­
as Aditya Birla Sun Life ESG Fund, Axis ESG Fund, ICICI Prudential ESG tisti et al. (2019) used data from the Italian stock market to test EVA and
Fund, Kotak ESG Opportunity Fund, Mirae Asset ESG Sector Leaders competitive advantage for ESG companies. Lööf et al. (2022) examined
ETF, Quantum India ESG Equity Fund, and SBI Magnum Equity ESG data from European countries and found that ESG ratings have helped
Fund (CRISIL, 2022). investors reduce their risk exposure to market turmoil caused by the
Investors apply ESG factors, which are non-financial factors, as a part COVID-19 pandemic while maintaining the fundamental trade-off be­
of their analysis process to assess risks and growth opportunities of a tween risk and reward.
firm. However, such factors are interconnected; thus, their classification The impact of size and performance on shareholder wealth has been
can be challenging (CFA, 2022). Institutions such as the Global proved empirically in both developed and developing countries (Kou­
Reporting Initiative (GRI, n.d.) have developed standards for sustain­ senidis et al., 2000). In addition, Drempetic et al. (2020) and Ramić
ability reporting to measure the organization’s impact on the economy, (2019) have shown the influences of firm market capitalization and
environment, and society. Thus, the main groups of ESG factors refer to return on investment (ROI) on ESG scores, respectively. Hence, the size
the environment (e.g., climate change and carbon emissions, air and factor and performance factor are key to understanding the true impact
water pollution, biodiversity, deforestation, energy efficiency, waste of ESG scores on returns empirically. In this study, we take both vari­
management, and water scarcity), society (e.g., customer satisfaction, ables as control variables to establish the impact of ESG score on
data protection and privacy, gender and diversity, employee engage­ short-run returns of individual stocks in India.
ment, community relations, human rights, and labor standards) and Anchored in the currently available body of knowledge, there is a
governance (e.g., board composition, audit committee structure, bribery shred of fragmented evidence on the individual E, S, and G factors’ in­
and corruption, executive compensation, lobbying, political contribu­ fluence on shareholder returns. Recently, Lueg and Pesheva (2021)
tion, and whistleblower schemes) of a firm (CFA, 2022). The ESG scores, investigated the positive influence of each ESG factor on total returns.
based on various ESG criteria, are used to objectively measure a com­ Earlier, Broadstock et al. (2021) found that cumulative stock returns are
pany’s performance concerning socially responsible practices. They are positively related to E and G, but not the S factor in the Chinese context.
also used to assess risks and opportunities and enable comparisons be­ However, the impact of E, S, and G factors on the return on shareholders’
tween companies across sectors (Balatbat et al., 2012). equity has not been examined in the context of the ever-growing
ESG investments have attracted the interest of mainstream investors. developing economy of India. Therefore, this study aims to propose
Ashwin Kumar et al. (2016) highlighted the importance of ESG factors the prediction model shown in Fig. 1.
for investors, using a new quantitative model. The authors established Fig. 1 shows the environmental, social, and governance scores as
empirical evidence of the link between ESG factors and investment independent variables and the monthly returns for four months after the
risk-adjusted performance. More recently, Ilhan et al. (2021) showed declaration of the scores are taken as dependent variables. Market
that firms with poor ESG profiles/scores, as reflected through higher capitalization and ROI are introduced as control variables in the pro­
carbon emissions, have higher tail risks. These results concur with ar­ posed model since they impact both the independent and dependent
guments stating that employing ESG considerations in investment de­ variables.
cisions can mitigate uncompensated portfolio risks and that reducing Therefore, anchored in the above-discussed arguments and based on
exposure risks is a major driver of shareholder engagement (Fortado, the recognized gaps in the domain literature, we posit the following set
2017). Thus, an increasing number of institutions actively engage with of hypotheses:
their portfolio firms to reduce exposure risks.
H1. ESG factors influence the return on shareholders’ equity
Krueger (2015) argued that it is not ESG factors that allow investors
to manage risks; instead, companies’ higher valuation effectively leads H1a. E factor influences the return on shareholders’ equity
to better financial shape. This enables investors to invest more in mea­
H1b. S factor influences the return on shareholders’ equity
sures that improve their ESG profile, which leads to firms accumulating
higher ESG scores. A higher ESG score thereby helps in identifying eq­ H1c. G factor influences the return on shareholders’ equity
uity stocks that result in higher shareholder wealth. This helps both
companies and investors in deciding whether to focus on individual 3. Methodology
factors of ESG or identify the score that is possibly more important from
an investor’s point of view. Recent findings seem to prove that com­ 3.1. Data and sample
panies that have implemented ESG principles outperform other ones
(Harper, 2020; Kurtz, 2020; Chen and Mussalli, 2020). To analyze the impact of individual ESG factor scores on returns, the
However, Eccles, Ioannou, and Serafeim (2012) and Allianz Global 4-month period following the announcement of ESG scores by Indian
Investors (2015) overlooked the issue of risk. By focusing on the idea credit rating agencies was considered. Notably, the Indian equity market
that ESG factors can help deliver what everyone wants— superior, belongs to the weak form of market efficiency (Parikh, 2013); hence, the
risk-adjusted performance over the long run—Eccles et al. (2012) ob­ publicly available information may be adjusted in the very short run.
tained the nexus high ESG–less risk as granted and leapfrog to show CRISIL India published a report on ESG scores for the top-listed Indian
improved financial, stock, and portfolio performance where ESG factors companies in June 2021. CRISIL is a leading credit rating agency in India
are analytically applied. Thus, the significance of ESG in relation to and its ratings and reports are used by investors to benchmark quality
wealth generation seems to be questionable without empirical evidence. ratings and make investment decisions (CRISIL, 2022).
Consequently, Bannier et al. (2019) found that increasing ESG scores As a sample period, we used 6 months before monthly adjusted
reduces firm risk (particularly downside risk), indicating an returns, and 6 months after monthly adjusted returns after the ESG
insurance-like characteristic of CSR. score, as reported by CRISIL in June 2021. We took 6 months on both
Research on the effects of ESG reporting on returns, especially in sides to cover one calendar year, as short-term can be defined as less
emerging markets has been on the rise. For instance, Park (2017) pre­ than one year for taxation purposes. We selected the ACE equity data
sented a positive linkage between ESG and firm performance for Korean considering its inclusiveness for our analysis; these data included all 225
firms, and Xiong (2021) found that in China, stocks containing low ESG companies, whose ESG scores were published by CRISIL (CRISIL, 2021).
risk seem to provide higher returns with better-tailed risk. In the context Table 2 shows all 225 Indian sample firms from 20 different

3
A. Parikh et al. Cleaner and Responsible Consumption 8 (2023) 100101

Fig. 1. Proposed Model.

following equations in our calculations:

Table 2
Sample distribution industry-wise (Source: Authors). 1 ∑6
HAAR = ARi (1)
No. Industry/Sector No of Total Percent 6 i=1
Firms Observations

1 Auto ancillary 10 120 4.44 1 ∑3

2 Auto OEM 9 108 4.00 QAAR = ARi (2)

3 i=1
3 Cement 12 144 5.33
4 Chemicals 15 180 6.67
5 Diversified 2 24 0.89 where AR represents the adjusted returns of equity shares for the event i,
6 Engineering and Capital 15 180 6.67 HAAR is the half-yearly average adjusted returns of equity shares, and
Goods
QAAR is the quarterly average adjusted returns of equity shares.
7 Financial 45 540 20.00
8 FMCG 25 300 11.11
9 Healthcare 4 48 1.78 4. Data analysis
10 Internet 4 48 1.78
11 IT 11 132 4.89
4.1. Descriptive statistics
12 Lubricants 1 12 0.44
13 Metals 10 120 4.44
14 Mining 2 24 0.89 Table 3 presents the descriptive statistics and shows that the gover­
15 Oil and gas 12 144 5.33 nance score has the highest mean of 67.06, while the environmental
16 Paints 4 48 1.78 score has the lowest mean of 47.88. After the ESG score announcement,
17 Pharmaceuticals 26 312 11.56
the third month (September 2021) shows the highest mean returns of
18 Power 11 132 4.89
19 Real estate 5 60 2.22 4.22% and the highest return of 94.76%. The lowest mean is reported in
20 Telecom 2 24 0.89
Total 225 2700 100
Table 3
Descriptive statistics (Source: Authors).
industries; the monthly returns recorded yielded a total of 2700 obser­ Variable Name Minimum Maximum Mean Std. Deviation
vations (=225*12) collected from ACE equity and cross-checked (SD)

through the Yahoo Finance database. The financial sector is dominant Environmental Score 22 86 47.88 12.86
in our sample at 20%, followed by the pharmaceuticals industry at Social Score 29 74 53.90 8.81
Governance Score 40 83 67.06 8.05
11.56%; the industry with the smallest representation is the telecom­
Market Capitalization (Rs. 4002 1,290,000 69,600 148,000
munication industry at 0.89%. in Crores)
Return on Investment − 22.79 49.11 2.20 9.73
(ROI)
3.2. The modeled relationships Jul2021 Returns − 20.48 49.11 2.20 9.73
Aug2021 Returns − 31.25 74.84 1.59 11.54
Sep2021 Returns 16.49 94.76 4.22 11.81
The average returns for 6 months were calculated from January 2021
−
Oct2021 Returns − 19.75 45.18 − 0.24 8.81
to June 2021 to find the pre–half-yearly average adjusted returns PreQAAR − 7.19 24.92 4.73 5.06
(HAAR) and from July 2021 to December 2021 for the post-HAAR. PostQAAR − 10.58 34.03 2.67 6.03
Similarly, the average returns were calculated from April 2021 to PreHAAR − 4.39 22.71 4.53 4.42
PostHAAR 6.99 14.46 1.25 3.88
June 2021 for the pre-quarterly average adjusted returns (QAAR) and −

from July 2021 to September 2021 for post-QAAR. We utilized the Note: N = 225.

4
A. Parikh et al. Cleaner and Responsible Consumption 8 (2023) 100101

the fourth month after the publication of the ESG score (October 2021), The model fits for all four models are significant (p < 0.05). Specif­
with a minimum return of − 19.75%. In addition, the average market cap ically, the E factor (β = − 0.135; p < 0.05) and G (β = 0.255; p < 0.05) are
is Rs. 69,600 crores with an average ROI of 2.2% per annum. significant predictors in Model 1, and the G factor is significant in Model
Before the publication of ESG scores, the average quarterly returns 2 (β = 0.233; p < 0.05) and Model 3 (β = − 0.249; p < 0.05). The E factor
are 4.73% with a standard deviation of 5.06%; the average half-yearly is an insignificant predictor in Models 2, 3, and 4, and the G factor is
returns are 4.53% with a standard deviation of 4.42%. After the publi­ insignificant in Model 4 at a 5% significance level. The S factor is
cation of ESG scores, the returns are 2.67% (quarterly) and 1.25% (half- insignificant for all of the models at a 5% significance level. Hence,
yearly) with standard deviations of 6.03% and 3.88%, respectively. Hypotheses H1a and H1c prove to be true for Model 1, and H1c proves to
be true for Models 2 and 3 at a 5% significance level. However, the S
4.2. Pre-post impact of ESG score announcement factor is significant at a 10% level in Models 3 and 4 with a negative
impact (β = − 0.190; p < 0.10) and positive impact (β = 0.143; p < 0.10)
To verify the before-and-after effect of the ESG score report on respectively.
adjusted returns, we created pairs of HAAR and QAAR to examine The control variables are significant and very crucial to predict the
whether the impact lasts for six-month data or three-month data. For monthly stock returns in all four models. Market cap shows significance
these paired samples, we used the t-test because the same group of share at 10% in all models and has very little impact on stock returns (β =
returns before and after the ESG scores report were considered. − 0.000007, 0.00001, − 0.0000003, and − 0.000000005, respectively,
We checked whether the ESG score announcement has an impact on for months 1–4). However, performance ROI is a very important control
returns. Table 4 shows that the average adjusted returns for the first and variable in predicting stock returns and shows a significant positive
second half of 2021 are significantly different (t = 9.201; p < 0.05). impact for the first two months and a significant negative impact for the
However, as the returns have a significant positive relationship, it next two months (p < 0.05; β = 0.226, 0.275, − 0.506, and − 0.247 for
cannot be concluded that the difference in returns is specifically due to months 1–4, respectively).
the ESG score announcement. The QAAR for both the first and second During the stepwise hierarchy regression analysis, the impact of the
quarters of 2022–23 were also found to be statistically different and control variables (market cap and ROI) is reduced, and the variances in
significant ((t = 3.840; p < 0.05) and have no significant relationship. shareholder wealth are explained in the context of ESG factors. Models 1
Therefore, the before-and-after QAAR results of the ESG scores to 4 are all significant (at 5%) with increases in R-squared of 4.7%, 3.3%,
announcement in the CRISIL reports are comparable. This signals a clear 4.1%, and 4.3%, respectively. These results reflect the importance of
3-month effect of the ESG scores announcement on the adjusted monthly individual E, S, and G scores as a factor that impacts stock returns in the
returns of companies whose ESG scores were reported. short run of 1–4 months.
The findings reveal that the G score for any company may remain
4.3. Impact of ESG individual score on shareholder wealth dominant, and thus, does have a positive impact on returns for the first
two months, and a negative impact for the third month. The E score,
In the next step, checked which of the three factors (i.e., E, S, or G) however, may impact only the first month negatively after the
influences shareholder wealth. We adopted a multiple linear regression announcement of ESG scores. The S score shows an impact at a 10%
analysis that measures the influence of independent variables on significance level the third month after the ESG score announcement.
dependent ones (Hair et al., 2010). To show the impact of the control
and main variables, we performed a stepwise hierarchy regression 5. Discussion and implications
analysis.
As shown in Table 5, first, we examined the impact of both control Interestingly, for India, the G factor shows a positive impact on
variables, market cap (size factor) and ROI (performance factor), on the returns while the E factor shows a negative one. This study demonstrates
dependent variable, stock returns (shareholder wealth). Secondly, we that a company’s engagement in ESG practices does affect its returns.
used ESG scores as independent variables to understand their impact on Therefore, this study offers insights related to the promotion of
stock returns. In addition, the enter method was used by indicating that responsible investing and the enhancement of company engagement in
all of the E, S, and G scores were processed simultaneously. ESG activities. However, the results show that only managing the
Regression models were formulated for the 1-month post-ESG governance factor eventually helps in increasing a company’s equity
announcement (Model 1), the 2-month post-ESG announcement returns. Notably, environmental activities negatively affect shareholder
(Model 2), the 3-month post-ESG announcement (Model 3), and the 4- wealth, and the social engagement of the company is insignificant as far
month post-ESG announcement (Model 4). Table 5 reports the results as equity returns are concerned.
of the regression analyses of the four models along with their R-squared This implies a possible downward shift in spending toward an
values and changes in R-squared values (the change in R-squared helps environment-friendly society, and is a major point of concern to stake­
in understanding whether an independent variable improves any holders, especially in emerging economies (Mohammad and Wasiuzza­
dependent variable explanation or not). man, 2021) where companies have not yet focused on the E factor, while
We checked for multi-collinearity issues through the variance infla­ not realizing its larger effect on society. From a policy perspective, the E
tion factor (VIF). VIF values for all independent variables E, S, and G are factor remains a concern for any emerging economy like India. Thus, this
1.534, 1.491, and 1.069 respectively, which is below 10 (Li et al., 2018); study indicates the need for governments and regulatory bodies to
this confirms that the data are free from multi-collinearity. In all four intervene to develop a relevant framework. This will possibly motivate
models, the independent variable and its score remain the same. Hence, companies to engage in environment-related activities without hurting
the value of VIF also remains the same for the same independent vari­ the financial wealth of shareholders. In terms of protecting the wealth of
ables in all four models. investors on a larger scale that addresses all stakeholders such as

Table 4
Effect of announcement of ESG scores of companies (Source: Authors).
Pair Observations (N) Coefficient of Correlation Sig (p-value) Mean Difference t -value Sig (p-value)

PreHAAR – PostHAAR 225 0.177 0.008* 3.2757 9.201 0.000*

PreQAAR – PostQAAR 225 − 0.041 0.542 2.0565 3.840 0.000*

Note: * denotes p < 0.05 level of significance.

5
A. Parikh et al. Cleaner and Responsible Consumption 8 (2023) 100101

Table 5
Hierarchy regression analysis for the impact of individual ESG scores on returns (Source: Authors).
Models for 1, 2, 3, and 4-month returns

Factors Model 1 Model 2 Model 3 Model 4

Coefficient p-value Coefficient p-value Coefficient p-value Coefficient p-value

Step 1
Const. 0.954 0.326 − 1.834 0.102 8.144 0.000 1.684 0.056
MarketCap − 7.39E− 06 0.090** 1.83E− 05 0.000* 3.26E− 07 0.094** 5.55E− 09 0.099**
ROI 0.226 0.012* 0.275 0.008* − 0.506 0.000* − 0.247 0.002*
Rsquared 0.038 0.092 0.096 0.041
Δ Rsquared 0.038 0.092 0.096 0.041
Step 2
Const. − 12.5 0.057 − 15.97 0.036 32.53 0.000 − 12.19 0.041
MarketCap − 9.40E− 06 0.049* 1.34E− 05 0.016* 7.35E− 06 0.091** 5.55E− 06 0.020*
ROI 0.131 0.161 0.246 0.024* − 0.480 0.000* − 0.194 0.023*
E − 0.134 0.034* 0.095 0.194 0.038 0.604 0.069 0.223
S 0.068 0.443 − 0.101 0.327 − 0.190 0.071** 0.143 0.077**
G 0.255 0.004* 0.233 0.022* − 0.249 0.016* 0.042 0.591
Rsquared 0.085 0.126 0.137 0.084
Δ Rsquared 0.047 0.033 0.041 0.043

Note: * denotes p < 0.05 level of significance; ** denotes p < 0.10 level of significance.

customers, suppliers, and shareholders, we recommend that the gov­ not be applicable in the global context. Last, while the study helps to
ernment assist companies that have lower competitive advantage via tax give investors a short-run advantage for creating equity returns, the
incentives, financial support, and training (Jallai, 2020), specifically for long-run impact on equity returns may differ. Thus, panel or time series
E factor activities. data should be used to identify the dynamic relationship between ESG
Our findings indicate that the G factor plays a significant role in factors and shareholder returns in the long run, globally.
increasing equity returns. Therefore, we urge for additional efforts from
the authorities in the form of legal and structural reforms that help in­ Author contribution statement
vestors have stronger confidence in companies that practice ESG. If
portfolio managers focus on G practices of companies by including them The authors contributed equally to this work.
in ESG-based portfolios before the ESG score announcement by the
credit rating agencies, they will likely gain additional returns that will
improve investors’ wealth. Companies should also focus on their Declaration of competing interest
transparency and clearly define their governance practices; doing this
will improve their G scores and increase shareholders’ wealth. We have no conflict of interest to declare.
In sum, this study extends the extant body of literature on ESG
practices by showing that a company’s use and disclosure of quality ESG Data availability
practices have a significant positive impact on investor relations. It
further augments the financial market literature by showing evidence Data will be made available on request.
that as companies engage less in financial misconduct, they strengthen
their relationships with all of their important stakeholders, thereby
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