Exploring risk-return behavior to examine sectoral influence on nifty ESG performance

Purpose The aim of this study is to analyze the asymmetric return co-movements between ESG oriented investment and sector index to determine how sectors depend on one another to support or eliminate ESG portfolio diversification. Design/methodology/approach In order to measure sector-specific effects, we introduce sectoral volatility as a moderator and use GARCH-M and E-GARCH model with a sample of January 2021 to August 2024 of the Indian stock market. These econometric models enable us to explain the effects of volatility on ESG returns as well as to identify asymmetric returns behavior across sectors. Findings The findings suggest that IT, financials and manufacturing industries are associated with positive impact on ESG returns, on the contrary, banking and pharmaceutical industries have negative effect. There are also asymmetric trends in ESG returns, and the study reflects that undertaking additional risk does not result in higher ESG returns. Also, volatility has a mitigating impact on the automobile and energy industry, which indicates their strength and growing adherence to the global sustainability trend, especially in the short-term fluctuations of the market. Research limitations/implications The results provide sufficient information to portfolio managers and policymakers, stating that a sector-specific approach to ESG investing is necessary. Sectoral risk-return dynamics may be used to optimize portfolio diversification in line with optimal risk-adjusted returns and ESG investments in line with sustainable growth trends. Originality/value The study will add to the emerging literature on ESG research because it will focus on the sectoral asymmetries of the ESG return co-movements and the implications of these findings on portfolio diversification. It incorporates industry-specific volatility effects to give a new understanding of the way other industries relate to ESG-oriented investments, and it can be useful in informing risk management and investment decision-making.