Indian Journal of Finance

Open Access Open Access  Restricted Access Subscription Access

ESG Score and Mutual Fund Performance : Empirical Evidence from India


Affiliations
1 FORE School of Management, New Delhi, “Adhitam Kendra,” B-18, Qutub Institutional Area, New Delhi - 110 016, India

   Subscribe/Renew Journal


This paper studied the relationship between risk-adjusted returns and ESG disclosures of mutual funds operating in India for 13 years. It tested whether the mutual funds with higher ESG scores generated higher risk-adjusted returns than those with lower ESG scores. Further, it also tested whether the mutual funds with higher ESG scores performed better during the COVID-19 crisis period. After controlling for Fama-French five factors, we found that the performance of mutual funds with higher ESG scores neither generated significant positive alphas during the normal period nor the COVID-19 period. The results pointed toward the higher cost of being socially responsible through higher screening costs, opportunity costs, etc. These findings will interest investors, policymakers, and other stakeholders regarding the perceived advantage of investing in socially responsible mutual funds.

Keywords

ESG, India, Mutual Funds Performance.

JELClassification Codes : G11, G12, G14

Paper Submission Date : January 24, 2023 ; Paper sent back for Revision : February 18, 2023 ; Paper Acceptance Date : March 5, 2023 ; Paper Published Online : March 15, 2023

User
Subscription Login to verify subscription
Notifications
Font Size

  • Albuquerque, R., Koskinen, Y., Yang, S., & Zhang, C. (2020). Resiliency of environmental and social stocks: An analysis of the exogenous COVID-19 market crash. The Review of Corporate Finance Studies, 9(3), 593–621. https://doi.org/10.1093/rcfs/cfaa011

  • Bauer, R., Derwall, J., & Otten, R. (2007). The ethical mutual fund performance debate: New evidence from Canada. Journal of Business Ethics, 70, 111–124. https://doi.org/10.1007/s10551-006-9099-0

  • Bauer, R., Koedijk, K., & Otten, R. (2005). International evidence on ethical mutual fund performance and investment style. Journal of Banking & Finance, 29(7), 1751–1767. https://doi.org/10.1016/j.jbankfin.2004.06.035

  • Becchetti, L., Ciciretti, R., Dalò, A., & Herzel, S. (2015). Socially responsible and conventional investment funds: Performance comparison and the global financial crisis. Applied Economics, 47(25), 2541–2562. https://doi.org/10.1080/00036846.2014.1000517

  • Benson, K. L., Brailsford, T. J., & Humphrey, J. E. (2006). Do socially responsible fund managers really invest differently? Journal of Business Ethics, 65, 337–357. https://doi.org/10.1007/s10551-006-0003-8

  • Białkowski, J., & Starks, L. T. (2016). SRI funds: Investor demand, exogenous shocks and ESG profiles (2016 BlackRock Research Conference). http://hdl.handle.net/10092/12492

  • Boulatoff, C., & Boyer, C. M. (2009). Green recovery: How are environmental stocks doing? The Journal of Wealth Management, 12(2), 9–20. https://doi.org/10.3905/jwm.2009.12.2.009

  • Bhanu Murthy, K. V., Bhandari, V., & Pandey, V. (2014). Does the Indian stock market encourage socially responsible companies? Manthan Journal of Commerce and Management, 1(1), 1–34.

  • Brammer, S., Brooks, C., & Pavelin, S. (2006). Corporate social performance and stock returns: UK evidence from disaggregate measures. Financial Management, 35(3), 97–116. https://doi.org/10.1111/j.1755-053x.2006.tb00149.x

  • Broadstock, D. C., Chan, K., Cheng, L. T., & Wang, X. (2021). The role of ESG performance during times of financial crisis: Evidence from COVID-19 in China. Finance Research Letters, 38, 101716. https://doi.org/10.1016/j.frl.2020.101716

  • Chang, C. E., & Doug Witte, H. (2010). Performance evaluation of US socially responsible mutual funds: Revisiting doing good and doing well. American Journal of Business, 25(1), 9–24. https://doi.org/10.1108/19355181201000001

  • Chopra, M., & Saldi, R. (2022). Investment in Bitcoin: A delusion or diligence? Indian Journal of Finance, 16(7), 8–22. https://doi.org/10.17010/ijf/2022/v16i7/170632

  • Clark, G. L., Feiner, A., & Viehs, M. (2015). From the stockholder to the stakeholder: How sustainability can drive financial outperformance. Available at SSRN. https://dx.doi.org/10.2139/ssrn.2508281

  • Cortez, M. C., Silva, F., & Areal, N. (2009). The performance of European socially responsible funds. Journal of Business Ethics, 87, 573–588. https://doi.org/10.1007/s10551-008-9959-x

  • Das, A. K. (2020). Performance of mutual funds industry in India and worldwide: A comparative analysis. Abhigyan, 38(2), 33–40.

  • Das, N., Chatterjee, S., Sunder, A., & Ruf, B. (2018). ESG ratings and the performance of socially responsible mutual funds: A panel study. Journal of Finance Issues, 17(1), 49–57. https://doi.org/10.58886/jfi.v17i1.2334

  • Das, N., Ruf, B., Chatterjee, S., & Sunder, A. (2018). Fund characteristics and performances of socially responsible mutual funds: Do ESG ratings play a role? Journal of Accounting and Finance, 18(6). https://doi.org/10.33423/jaf.v18i6.449

  • Derwall, J., Guenster, N., Bauer, R., & Koedijk, K. (2005). The eco-efficiency premium puzzle. Financial Analysts Journal, 61(2), 51–63. https://doi.org/10.2469/faj.v61.n2.2716

  • Derwall, J., & Koedijk, K. (2009). Socially responsible fixed-income funds. Journal of Business Finance & Accounting, 36(1–2), 210–229. https://doi.org/10.1111/j.1468-5957.2008.02119.x

  • Delevingne, L., Gründler, A., Kane, S., & Koller, T. (2020, February 12). The ESG premium: New perspectives on value and performance. McKinsey & Company. https://www.mckinsey.com/business-functions/sustainability/our-insights/the-esg-premium-new-perspectives-on-value-and-performance

  • Dolvin, S. D., Fulkerson, J. A., & Krukover, A. (2017). Do “good guys” finish last? The relationship between morningstar sustainability ratings and mutual fund performance. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3019403

  • Durán-Santomil, P., Otero-González, L., Correia-Domingues, R. H., & Reboredo, J. C. (2019). Does sustainability score impact mutual fund performance? Sustainability, 11(10), 2972. https://doi.org/10.3390/su11102972

  • Galema, R., Plantinga, A., & Scholtens, B. (2008). The stocks at stake: Return and risk in socially responsible investment. Journal of Banking & Finance, 32(12), 2646–2654. https://doi.org/10.1016/j.jbankfin.2008.06.002

  • Gil-Bazo, J., Ruiz-Verdú, P., & Santos, A. A. (2010). The performance of socially responsible mutual funds: The role of fees and management companies. Journal of Business Ethics, 94, 243–263. https://doi.org/10.1007/s10551-009-0260-4

  • Gregory, A., Matatko, J., & Luther, R. (1997). Ethical unit trust financial performance: Small company effects and fund size effects. Journal of Business Finance & Accounting, 24(5), 705–725. https://doi.org/10.1111/1468-5957.00130

  • Gupta, M., & Chander, S. (2011). Consideration of sources of information as selection criteria in mutual fund purchase: A comparative study of retail and non-retail investors. IUP Journal of Applied Finance, 17(1), 27.

  • Hamilton, S., Jo, H., & Statman, M. (1993). Doing well while doing good? The investment performance of socially responsible mutual funds. Financial Analysts Journal, 49(6), 62–66. https://doi.org/10.2469/faj.v49.n6.62

  • Han, J.-J., Kim, H. J., & Yu, J. (2016). Empirical study on relationship between corporate social responsibility and financial performance in Korea. Asian Journal of Sustainability and Social Responsibility, 1, 61–76. https://doi.org/10.1186/s41180-016-0002-3

  • Hartzmark, S. M., & Sussman, A. B. (2019). Do investors value sustainability? A natural experiment examining ranking and fund flows. The Journal of Finance, 74(6), 2789–2837. https://doi.org/10.1111/jofi.12841

  • Hassan, S., & Fazili, A. I. (2019). Risk perception of mutual fund investors. Abhigyan, 37(1), 60–69.

  • Inflows in sustainable funds surge 76% to Rs 3,686 crore in FY21. (2021, April 23). The Economic Times. https://economictimes.indiatimes.com/mf/mf-news/inflows-in-sustainable-funds-surge-76-to-rs-3686-cr-infy21/articleshow/82209562.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

  • Kaur, S., & Pasricha, J. S. (2019). Problems faced by bank employees in implementation of financial inclusion schemes. Indian Journal of Finance, 13(12), 34–49. https://doi.org/10.17010/ijf/2019/v13i12/149267

  • Kavita & Suman. (2019). Determinants of financial inclusion in India: A literature review. Indian Journal of Finance, 13(11), 53–61. https://doi.org/10.17010/ijf/2019/v13i11/148417

  • Kumar, R., & Arora, R. S. (2013). Investors’ perception about mutual funds in India: An empirical study. Indian Journal of Finance, 7(1), 44–52. https://www.indianjournaloffinance.co.in/index.php/IJF/article/view/72151

  • Lean, H. H., Ang, W. R., & Smyth, R. (2015). Performance and performance persistence of socially responsible investment funds in Europe and North America. The North American Journal of Economics and Finance, 34, 254–266. https://doi.org/10.1016/j.najef.2015.09.011

  • Ledwani, S., Chakraborty, S., & Digal, S. K. (2022). The evolution of Indian Journal of Finance: A retrospective review and future directions. Indian Journal of Finance, 16(4), 8–30. https://doi.org/10.17010/ijf/2022/v16i4/169172

  • Leite, P., & Cortez, M. C. (2015). Performance of European socially responsible funds during market crises: Evidence from France. International Review of Financial Analysis, 40, 132–141. https://doi.org/10.1016/j.irfa.2015.05.012

  • Mishra, R., & Ahuja, V. (2016). Performance evaluation of Indian mutual funds during bull and bear periods. Indian Journal of Finance, 10(8), 24–42. https://doi.org/10.17010/ijf/2016/v10i8/99318

  • Mondal, I., & Johari, R. (2021). Longitudinal analysis of investment pattern: A study of Alankit Limited Clients. Abhigyan, 38(4), 19–29. https://doi.org/10.56401/abhigyan/38.4.2021.19-29

  • Muñoz, F., Vargas, M., & Marco, I. (2014). Environmental mutual funds: Financial performance and managerial abilities. Journal of Business Ethics, 124, 551–569. https://doi.org/10.1007/s10551-013-1893-x

  • Murashima, M. (2023). The impact of the COVID-19 pandemic on motivating factors affecting individual investors’ socially responsible investment decision: A comparative analysis of the USA, Germany and Japan. Corporate Governance, Vol. Ahead-of-Print No. (ahead-of-print). https://doi.org/10.1108/cg-08-2022-0342

  • Naffa, H., & Fain, M. (2022). A factor approach to the performance of ESG leaders and laggards. Finance Research Letters, 44, 102073. https://doi.org/10.1016/j.frl.2021.102073

  • Nofsinger, J., & Varma, A. (2014). Socially responsible funds and market crises. Journal of Banking & Finance, 48, 180–193. https://doi.org/10.1016/j.jbankfin.2013.12.016

  • Omura, A., Roca, E., & Nakai, M. (2021). Does responsible investing pay during economic downturns: Evidence from the COVID-19 pandemic. Finance Research Letters, 42, 101914. https://doi.org/10.1016/j.frl.2020.101914

  • Pástor, Ľ., & Vorsatz, M. B. (2020). Mutual fund performance and flows during the COVID-19 crisis. The Review of Asset Pricing Studies, 10(4), 791–833. https://doi.org/10.1093/rapstu/raaa015

  • Renneboog, L., Ter Horst, J., & Zhang, C. (2008). Socially responsible investments: Institutional aspects, performance, and investor behavior. Journal of Banking & Finance, 32(9), 1723–1742. https://doi.org/10.1016/j.jbankfin.2007.12.039

  • Rathner, S. (2013). The influence of primary study characteristics on the performance differential between socially responsible and conventional investment funds: A meta-analysis. Journal of Business Ethics, 118, 349–363. https://doi.org/10.1007/s10551-012-1584-z

  • Rehmani, A. (2018). Performance evaluation of select mutual funds: A public-private comparison. Indian Journal of Finance, 12(9), 41–55. https://doi.org/10.17010/ijf/2018/v12i9/131563

  • Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, 19(3), 425–442. https://doi.org/10.2307/2977928

  • Soni, T. K., & Singh, A. (2020). Directors’ remuneration, corporate governance and firm performance linkages: Evidence from the emerging country [Special issue]. Corporate Ownership & Control, 18(1), 382–392. https://doi.org/10.22495/cocv18i1siart12

  • Statman, M., & Glushkov, D. (2009). The wages of social responsibility. Financial Analysts Journal, 65(4), 33–46. https://doi.org/10.2469/faj.v65.n4.5

  • Steen, M., Moussawi, J. T., & Gjølberg, O. (2020). Is there a relationship between Morningstar’s ESG ratings and mutual fund performance? Journal of Sustainable Finance & Investment, 10(4), 349–370. https://doi.org/10.1080/20430795.2019.1700065

  • Trinks, P. J., & Scholtens, B. (2017). The opportunity cost of negative screening in socially responsible investing. Journal of Business Ethics, 140, 193–208. https://doi.org/10.1007/s10551-015-2684-3

  • Tripathi, V., & Bhandari, V. (2015). Do ethical funds underperform conventional funds? Empirical evidence from India. International Journal of Business Ethics in Developing Economies, 4(2). https://doi.org/10.21863/ijbede/2015.4.2.009

  • US SIF. (2022). US SIF trends report. https://www.ussif.org/trends#:~:text=The%20US%20SIF%20Foundation%20released,here%20to%20purchase%20the%20report


Abstract Views: 448

PDF Views: 0




  • ESG Score and Mutual Fund Performance : Empirical Evidence from India

Abstract Views: 448  |  PDF Views: 0

Authors

Tarun Kumar Soni
FORE School of Management, New Delhi, “Adhitam Kendra,” B-18, Qutub Institutional Area, New Delhi - 110 016, India

Abstract


This paper studied the relationship between risk-adjusted returns and ESG disclosures of mutual funds operating in India for 13 years. It tested whether the mutual funds with higher ESG scores generated higher risk-adjusted returns than those with lower ESG scores. Further, it also tested whether the mutual funds with higher ESG scores performed better during the COVID-19 crisis period. After controlling for Fama-French five factors, we found that the performance of mutual funds with higher ESG scores neither generated significant positive alphas during the normal period nor the COVID-19 period. The results pointed toward the higher cost of being socially responsible through higher screening costs, opportunity costs, etc. These findings will interest investors, policymakers, and other stakeholders regarding the perceived advantage of investing in socially responsible mutual funds.

Keywords


ESG, India, Mutual Funds Performance.

JELClassification Codes : G11, G12, G14

Paper Submission Date : January 24, 2023 ; Paper sent back for Revision : February 18, 2023 ; Paper Acceptance Date : March 5, 2023 ; Paper Published Online : March 15, 2023


References





DOI: https://doi.org/10.17010/ijf%2F2023%2Fv17i3%2F172671