The Next ESG Hot Spot: India?

Investors using environmental, sustainable, and governance-based (ESG) screens in India would have outperformed their peers in all types of economic cycles, two academics have claimed.

In a paper examining the performance of the Indian stock market, Vanita Tripathi and Varun Bhandari, from the Delhi School of Economics, found companies that had adopted ESG principles outperformed the rest of the index.

“Regulators, policy makers, and mutual funds should make available SRI products to initiate the movement of socially responsible investing in India.” —Tripathi and Bhandari“It is found that socially responsible stocks portfolios generated significantly higher returns than other portfolios, whether it is boom or recession,” the paper said.

The pair used various risk-adjusted measures, including Sharpe ratios and the Fama-French three factor model for estimating and assessing returns.

“The result of Fama’s decomposition measure demonstrates that socially responsible portfolios outpaced other portfolios, even on the basis of net selectivity return during boom and recessionary periods,” the paper said.

The Indian Prime Minister, Narendra Modi, was ushered into parliament last year after running an election campaign that promised to rid the country of deep-seated corruption.  The authors of this paper urged those in charge to go even further and help attract more investment to the region.

“We suggest that regulators, policy makers, and mutual funds should construct and make available various socially responsible investment products to initiate the movement of socially responsible investing in India,” the paper said. “The policy makers can also push financial sector reforms in the direction of SRI to enforce corporate and social responsibility law.”

The full paper is available for download.

Related: The Capitalists’ Guide to ESG & Is Reputation More Important Than Morals in Responsible Investing?