Angels or Sinners? Exploring the halo effect in ESG investing in Indian equities

Purpose This study examines whether environmental, social and governance (ESG) scores influence portfolio performance, risk and market valuation in the Indian equity market, specifically exploring whether higher ESG scores deliver a performance advantage or valuation premium. Given the efforts of SEBI and industry bodies to enable a common reporting standard from FY2024-25, understanding the impact of ESG in India is particularly pertinent, yet underexplored. Design/methodology/approach Using data from Indian firms between September 2013 and September 2023, we constructed tercile portfolios based on ESG scores, employing both market-capitalisation and equal-weighting approaches. Performance and risk characteristics were assessed through portfolio analysis, while valuation and factor exposures were examined using Fama–MacBeth regressions and the Fama–French five-factor plus momentum model. Findings Higher ESG scores do not consistently enhance portfolio returns in the Indian equity market, although equal-weighted high-ESG portfolios exhibit marginally better downside risk characteristics. The market does not consistently assign valuation premiums to high-ESG firms, with sectoral and size effects playing a significant role. High-ESG portfolios exhibit a positive tilt toward the profitability factor but lack meaningful exposures to other asset pricing factors such as value, momentum or conservative investment behaviour. Originality/value This study provides novel empirical insights into the interplay between ESG scores and financial performance in the Indian equity market, an underexplored area in the ESG literature. These findings are especially relevant for institutional investors and corporate stakeholders in India looking to integrate ESG considerations into strategic decisions and investment frameworks.