Impact of environmental, social, and governance factors on the price discovery process in the Indian stock market

Environmental, Social, and Governance (ESG) factors are important in evaluating a company’s performance while aligning investment with governance, ethical, environmental, social commitment, and sustainability goals. Recent years have seen an increasing focus on ESG factors, leading to a corresponding evolution in financial markets. ESG is emerging as a key factor among other non-financial performance indicators that impact market dynamics, price, and investment strategies. This study investigates the price discovery process at the firm level in reference to ESG in the Indian stock market. The data were analyzed for 11 key sectors using the daily closing prices in the spot market and futures market prices of selected firms, along with their respective ESG scores. The study used the stationarity test and order of integration test, followed by applying the Johansen cointegration test to analyze long-run co-integrating relationships among futures and spot market prices. Finally, the vector error correction mechanism (VECM) test was applied to detect long-term causality. Findings reveal that the price discovery process takes place in the Indian stock market and is significantly affected by the ESG factor. In the case of a high ESG score, the spot market leads the futures market, while for stocks with low ESG scores, the futures market price leads the spot price. Cement, oil, gas, and pharmaceutical sectors have shown a negative association between the price discovery process and ESG scores, while in the case of the service sector, the positive association is witnessed between ESG scores and the price discovery process between futures and spot prices.