Esg Portfolio vs Traditional Portfolio Analysis-a Study Of MSCI ESG Indices

Abstract

Corporate’s ability to create long-term value for stakeholders doesn’t only depend on financial information, but also on integrating non-financial information in the form of Environmental, Social, and Governance (ESG) issues. The financial community is keen on the management of ESG issues by the company which would provide strategic opportunities and also may create strategic threats. Therefore, in the present era of the business environment, it has become necessary to integrate this non-financial information into annual reports or as separate reports on ESG issues. The evolution of ESG integration is a kind of top-down approach where international institutional investors/ foreign portfolio investors have initiated the process and followed by regulatory bodies and finally at the bottom, the corporates who are obliged to disclose information on relevant ESG issues. Various international organs or bodies made initiations to integrate ESG disclosure. Eventually, capital markets of countries were made to frame regulatory guidelines, and the respective stock exchanges introduced ESG based indices. Similarly, some institutions like Morgan Stanley Capital Internal (MSCI), Standard & Poor (S&P), Sustainalytics, PricewaterhouseCoopers (PwC), and others provide ESG related services. The present study analyzed 22 ESG country leader indices along with the MSCI World ESG leader index and corresponding benchmark indices of the countries from developed and emerging markets. Monthly returns of all the indices from April 2014 to March 2021 have been collected for the study to calculate descriptive statistics, correlation of ESG indices with their respective benchmark indices, Co-integration and Granger Causality. The results found that ESG indcies have faredwell in terms of return during the study period, but traditional indices have outperformed. In case of Granger Causality test, results have shown that traditional and ESG indices do not Granger each other but are co integrated in long-term.