Revaluating Sustainability by Integrating ESG into the Fama-French Asset Pricing Model in India

Abstract

Introduction: This study examines the effects of ESG performance on stock returns in India through incorporation of ESG to the Fama-French five-factor model. It fills the research gap by testing ESG effects in an emerging market environment with econometric models.

Objectives: In order to look at the impact of ESG performance on excess stock returns in the Indian market with the integration of ESG scores in the Fama-French five-factor model and to study the interaction between ESG and size and value factors in shaping the return dynamics.

Methods: Utilizing panel data for 183 Indian companies (2014–2023), the study applies pooled OLS, fixed effects and logit regressions. ESG scores are lagged, integrated with both the traditional Fama-French factors and the interaction terms and quadratic components in order to assess linear and nonlinear pricing effects.

Results: The results from pooled OLS regressions and fixed effects panel regressions show that ESG has a statistically significant positive effect on excess returns. According to the results of a logit regression model, ESG scores create a positive impact on the chances of positive abnormal returns. Research using a two-sample t-test proves that businesses scoring higher on ESG than the median demonstrate superior market performance when compared to firms in the lower-performance category. The value premium receives an enhancement from ESG investments according to interaction models, but the size effect receives a moderation as per these models, and non-linear analysis detects no evidence of reduced ESG returns.

Conclusions: The study enriches existing research by establishing the implementation of ESG effects in a confined econometric framework, which produces fresh expertise on sustainability price effects in emerging markets