Exploring the financial performance of ESG investing in India : evidence using asset-pricing models

Purpose - Contrary to the developed markets, where ESG (environmental, social and governance) investing has received considerable attention, the extant literature in the context of emerging markets remains fragmented and scarce. To fill this gap, the study examines the financial performance of ESG investing in an emerging market, India. Design/methodology/approach - The study evaluates the financial performance of ESG indices listed on major Indian exchanges against market benchmarks using the Capital Asset Pricing Model (CAPM) and multi-factor models (Fama-French three-factor, Carhart four-factor and Fama-French five-factor) from 2011 to 2023. It investigates performance differences through investors' underreaction to positive earnings surprises, assesses the impact of market crises and examines the effects of mandatory CSR provisions and the Paris Agreement using difference-in-differences (DiD). Risk-return metrics are computed for robustness. Findings - The findings indicate that ESG portfolios exhibit lower market risk than conventional portfolios and generate positive, albeit statistically insignificant, alphas. Earnings surprises explain higher abnormal returns for ESG constituents, suggesting investors' underreaction to positive information. Additionally, ESG investments demonstrate greater resilience during market downturns, as evidenced by crisis period analyses. Originality/value - The outcomes provide important perspectives from an emerging market in the context of a growing interest in sustainable investment practices. This study offers important implications for academia and practitioners promoting sustainable finance and investment.