Domestic ESG-Focused Firms Performed Better Than Global Peers In Price Volatility, Equity Returns: RBI Study

Large listed domestic companies with an active ESG (environmental, social and governance) framework have performed better than their broad market counterparts even during extreme market events like the pandemic shocks, says an RBI study.

The RBI study of 18 economies with such frameworks, indicate that investors reward pro-climate and pro-socially oriented companies.

The analysis is based on the 10 emerging countries of Brazil, China, India, Indonesia, South Korea, Malaysia, Russia, South Africa, Taiwan, and Thailand; and the eight advanced economies of Australia, Britain, Canada, Hong Kong, Japan, Sweden, Switzerland, and the US.

The ESG study based on the Morgan Stanley Capital International (MSCI's) ESG indices is published in the February bulletin of the Reserve Bank.

The study noted that the ESG leaders' indices have outperformed the broad indices for most of the countries in the sample, and the outcomes are based on these numbers from 2010 when the ESG concept began to gather momentum.

The findings suggested that the companies which have managed and disclosed their ESG related risks better are associated with higher stock prices compared to a larger set of listed companies which do not have such disclosures.

India ranks ahead of all the countries except China and Taiwan in terms of the relative returns in ESG leaders' index but tops the chart in terms of least price volatility during market upheavals', the study said, adding while the average volatility was 86 per cent during the pandemic shocks, India's was only 74 per cent.

The relative growth in India's ESG index is also among the top countries during this period within the set of 18 countries in the sample, the study noted.

During the sample period, there is no clear association between the average annual returns and the average risks in the ESG leaders' price indices among the set of countries. The risks in ESG indices, however, are broadly in line with the risks in the broad indices across countries.

In general, the risk in both broad indices and ESG indices are higher in emerging markets compared to advanced markets and an analysis of the monthly ESG returns suggests that India's ESG companies have given higher returns.

An analysis of the volatility clustering of broad and ESG indices indicated that volatility, in general, is lower in the advanced economies, than emerging markets. But overall India ESG index saw the second least volatility at 78 per cent while Hong Kong had the lowest at 74 per cent.

In Brazil it was 95 per cent, China (85), Indonesia (95) South Korea (79), Malaysia (85), Russia (87), South Africa (87), Taiwan (84) Thailand (81) Australia (86), Britain (89), Canada (82), Hong Kong (74), Japan (91), Sweden (91), Switzerland (95), and the US at 91 percent.

The market events cover periods between September 2010 and August 2021.

The study estimated the cumulative returns in ESG price indices with respect to the returns in broad indices and found that the compounded annual return by India's ESG leaders is more than 4 percentage points higher than what is predicted by the market model. The list is topped by China, Hong Kong and England.

This suggested that in the aftermath of the initial pandemic shock, the ESG leaders have significantly outperformed the rest of the market in several economies, and India is among the top performing countries on the basis of this criterion.