Analysis of ESG disclosure scores in the Indian context: Impact on stock returns and other variables

Abstract

The paper attempts to study the relationship between ESG Disclosure Scores and stock market returns for Indian companies. ESG refers to Environmental, Social and governance scores. They are the latest tool used to determine the commitment of the firm towards sustainable performance/working. The ESG Disclosure scores are scores given to companies by Bloomberg based on the level of transparency in their disclosure of ESG related variables in their annual reports. The data is collected for 4 years from 2011 to 2014 for 500 companies on an average per year. A regression of the stocks’ returns on four factors as described by the Cahart model has been performed. The results show a slightly negative correlation with no significance. This could be attributed to the lack of cognizance on the investors’ part on the effect of ESG Disclosure on the residual risks of the firm. The paper proposes further studies too, on the relationship between ESG Disclosure Scores and cost of capital and ratings and inclusions in prestigious lists like “India’s most sustainable companies”.