This document discusses a comparative study between traditional and ESG (environmental, social, and governance) dimensions for portfolio construction. It provides background on portfolios and the efficient market hypothesis. It then defines ESG factors and discusses evidence that integrating ESG into analysis and construction may offer long-term performance advantages. The document outlines how ESG scores were calculated for various Indian companies and how their stock performance correlated with these scores over two years. Integrating ESG scores resulted in higher expected returns and lower risk compared to traditional portfolio construction methods. However, more standardized ESG data and analysis is still needed in India.

1. A COMPARATIVE STUDY BETWEEN
TRADITIONAL
AND ESG DIMENSIONS FOR PORTFOLIO
CONSTRUCTION
ARCHIESMAN BANERJEE

2. WHAT IS A PORTFOLIO ??
 IT IS A COMBINATION OF SECURITIES, STOCKS,
BONDS AND MONEY MARKET INSTRUMENTS
 COMBINATION OF SECURITIES TO EARN A RETURN
WITH DIVERSIFIED RISK SITUATION
 SPREADING OF RISK OVER DIFFERENT SECURITIES

3. HINT OF PRESENCE OF EFFICIENT
MARKET!!!
 TRADITIONAL APPROACH BELIEVES THAT THERE IS NO
EFFICIENT MARKET AND THE INVESTER COULD TAKE
ADVANTAGE OF THE MARKET WITH TECHNICAL AND
FUNDAMENTAL ANALYSIS
 IT IS AN INVESTMENT THEORY ACCORDING TO WHICH ALL
SHARE PRICES REFLECT ALL INFORMATION.
 INVESTORS HAVE ACCESS TO ALL THE RELEVANT MARKET
INFORMATION
 DOES THE ENVIRONMENT, SOCIAL, GOVERNENCE FACTORS
STAND A CHANCE TO BE CONSIDERED AS “INFORMATION” ???

4. WHAT IS ESG ??
 ENVIRONMENT, SOCIAL AND GOVERNENCE DIMENSIONS OF A COMPANY.
 THERE IS GROWNING EVIDENCE THAT SUGGESTS THAT ESG FACTORS,
WHEN INTEGRATED INTO INVESTMENT ANALYSIS AND PORTFOLIO
CONSTRUCTION, MAY OFFER INVESTORS POTENTIAL LONG TERM
PERFORMACE ADVANTAGES.
 THE MOVE TOWARDS ESG WAS FIRST INITIATED IN 1960’s AS SOCIALLY
RESPONSIBLE INVESTMENT DRIVE IN THE EUROPE AND UNITED STATES
OF AMERICA
 THIS DRIVE WAS STOP INVESTING IN COMPANIES WITH WHICH THE
MORAL VALUES OF THE INVESTORS CONFLICTED.

5. DOES IT ONLY CONCERNS WITH MORAL
VALUES ???
 THERE EXISTS SUCH TRAITS THAT REFER THAT THERE BELONGS SOME
CONSISTENCY IN PROVIDING A CORRELATION BETWEEN ESG ANALYTICS
AND THE OPERATIONAL STATISTICS.
 IT IS MORE COMMONLY OBSEREVED THAT THE COMPANIES WITH BETTER
ESG RATINGS ARE HAVING BETTER RETURNS OVER CAPITAL EMPLOYED.
 THE STABILITY IN THE EARNINGS OF THE COMPANIES CONSIDERING ESG
FACTORS SERIOUSLY IS ALSO PRESENT
 BETTER ESG SCORES INDICATE LOWER SHARE PRICE VOLATILITY

6. (DHANBAD – KATRAS – JHARIA)
BUT HOW IS THAT HAPENNING ??

7.  BETTER ENVIRONMENT SCORES IMPLIES
 LESS CONTROVERSIES
 BETTER ENERGY MANAGEMENT
 EFFICIENT WASTE MANAGEMENT
 BETTER RELATIONS WITH THE STAKEHOLDERS

8. BETTER SOCIAL SCORES IMPLIES
 GOOD WORKING CONDITIONS FOR THE EMPLOYEES
 LESS HEALTH HAZARDS
 LESS CUSTOMER RELATED CONTROVERSIES
 BETTER RELATIONS WITH THE COMMUNITY
 BETTER CORPORATE GOVERNANCE SCORES
IMPLIES
 MORE DIVERSE BOARD OF DIRECTORS
 HIGHER BOARD INDEPENDENCE
 AUDIT COMMITTEE INDEPENDENCE
 BETTER POLICY AND RELATIONSHIP WITH THE GOVERNMENT

9. ARE THERE ANY STUDIES MADE IN THE
PAST ??
 STURDIVANT AND GINTER (1977) EXAMINED THE RELATIONSHIP BETWEEN
SOCIAL RESPONSIVENESS AND GROWTH IN EARNINGS PER SHARE FROM 1964-
1974 OF 28 FIRMS OUT OF TOTAL 67 FIRMS.
 THESE 67 FIRMS WERE EARLIER CITED BY MOSKOWITZ (1974) AS BEING THE
BEST OR WORST IN TERMS OF SOCIAL RESPONSIBILITY.
 COMPARISION OF THESE CATAGORIES OF SOCIALLY RESPONSIBLE FIRMS AND
THEIR GROWTH IN EARNINGS PER SHARE RELATIVE TO THEIR INDUSTRY
AVERAGE INDICATED THAT THE GROWTH FOR THE BEST MENTIONED FIRMS
WERE HIGHER THAN THAT OF THE WORST COMPANIES.

10. HAS IT EVER BEEN USEFUL?
 MOST OF THE ADAPTATION HAS HAPPENED IN THE EUROPEAN
COUNTRIES AND THE USA.
 THE STABILITY IN THE RETURNS AND GROWTH IN COMPANIES BASED IN
THESE COUNTRIES ARE SIGNIFICANTLY HIGHER THAN THAT OF THE
OTHER COUNTRIES.
 IT IS CERTAINLY A NEW CONCEPT FOR THIS PART OF THE WORLD AS
THERE HASN’T BEEN ANY SUBSTANTIAL ANALYSIS TO PROVE
GUARANTEED EFFECT.

11. IF ESG IS THE WAY TO GO THEN …
WHY THIS IS NOT WIDELY ADOPTED???

12.  NON-AVAILABILITY OF USEFUL DATA
 INABILITY TO DETERMINE THE MATERIALITY OF THE
AVAILABLE ESG DATA.
 IF FINANCIAL IMPROVEMENTS DO NOT CORRELATE WITH
ESG DATA THEN WIDESPREAD ESG IMPLEMENTATION WOULD
FAIL
 NOBODY CARES ABOUT ENVIRONMENT AND SOCIAL IMPACTS
OR BROADER GOVERNANCE ISSUES SUCH AS CORRUPTION.
PRIME OBJECTIVE IS TO INCREASE VALUE OF THE
SHAREHOLDERS.

13. HOW THE ANALYSIS WAS DONE ??
 COMPANIES WERE SHORTLISTED FROM GRI: SDD DATABASE ON THE
BASIS OF SIMILARITY OF REPORTING (GRI G4).
 UNORGANISED AVAILABLE DATA WAS ORGANISED BY VARIOUS
ARITHMETICAL CONVERSIONS TO BRING ALL INTO SIMILAR UNIT OF
MEASUREMENTS TO ESTABLISH USABILITY.
 RANKING OF COMPANIES WAS DONE ON THE BASIS OF ESG
PERFORMANCE ON A PERCENTILE BASIS
 SHARE PRICE DATA WAS OBTAINED FROM THE NATIONAL STOCK
EXCHANGE WEBSITE FOR A 3 YEAR PERIOD FROM 2014 TO 2017

14. SELECTION OF COMPANIES FROM
VARIOUS INDUSTRIES !!!
 SELECTED FEW INDIAN COMPANIES FROM VARIOUS INDUSTRIES ON THE BASIS OF
AVAILABILITY OF USEFUL DATA:
 BHARAT PERTROLEUM CORP. LTD (BPCL)
 JINDAL STEEL (JSW)
 GAIL INDIA LTD.
 ITC LTD.
 INDIAN OIL CORPORATION LTD (IOCL)
 HAVELLS INDIA LTD

15. ESG INDICATORS CONSIDERED !!
 ENVIRONMENT: THE EMMINSION OF CO2e (GHG) HAS BEEN
CONSIDERED.CONVERSION DONE FROM KT, MT TO TCO2e.
 GRI IDENTIFICATION-GRI/G4-EN15-21
 SOCIAL: FATALITIES OR TOTAL NO. OF WORK HAZARDS AGGREGATED
 GRI IDENTIFICATION-GRI/G4-LA6/7
 GOVERNANCE: BOARD INDEPENDENCE OR INDEPENDENCE OF BOARD MEMBERS
ARE CALCULATED FROM THE BOARD STRUCTURE DATA PROVIDED IN THE
REPORTS.
 GRI IDENTIFICATION-GRI/G4-G34

16. 2016
EMMISION BASIC SCORE FATALITIES BASIC SCORE BOARD INDEPENDENCE EMMISSION FATALITIES
4240190 0.13 21 0.22 0.54 0.87 0.78
32101000 1.00 83 1.00 0.46 0.00 0.00
2969858 0.09 4 0.00 0.36 0.91 1.00
1476000 0.04 18 0.18 0.5 0.96 0.82
13640000 0.42 14 0.13 0.53 0.58 0.87
65,171 0.00 62 0.73 0.54 1.00 0.27
2015 (1-E1) (1-S1)
EMMISION SCORE (E1) FATALITIES SCORE (S1) BOARD INDEPENDENCE EMMISSION FATALITIES
3999450 0.13 21 0.16 0.54 0.87 0.84
30973000 1.00 77 1.00 0.46 0.00 0.00
2533629 0.08 18 0.12 0.36 0.92 0.88
1519000 0.05 11 0.01 0.5 0.95 0.99
12910000 0.42 10 0.00 0.53 0.58 1.00
61,693 0.00 70 0.90 0.54 1.00 0.10

17. OVERALL ESG PERFORMACE !!!
0.14174
0.06042
0.21677 0.21693 0.21353
0.15060
0.19972
0.04186
0.20653 0.20738
0.18017
0.16434
0.20319
0.04157
0.19525
0.22031
0.19107
0.14861
0.00000
0.05000
0.10000
0.15000
0.20000
0.25000
BPCL JSW GAIL ITC IOCL HAVELLS
ESG SCORES
2016-17 2014-15 2014-15

18. PROCESS OF ANALYSIS !!!
 STEP 1: SETTING EQUAL WEIGHTS FOR ALL THE SECURITIES
AND CALCULATION OF EXPECTED PORTFOLIO RETURN
 STEP 2: CALCULATION OF WEIGHTS BY OPTIMISING
PORTFOLIO WITH SHARPE RATIO MAXIMISATION TECHNIQUE
 STEP 3: SET WEIGHT OF SECURITIES ACCORDING TO ESG
SCORES
 STEP 4: COMPARE THE OBTAINED RESULTS

19. AVERAGEDAILYR(f) -0.041%
BPCL JSW GAIL ITC IOCL HAVELLS
AVERAGEDAILYRETURN -0.028% -0.184% 0.063% -0.037% 0.088% 0.178%
COMPANY BPCL JSW GAIL ITC IOCL HAVELLS
WEIGHT 0.166666667 0.166666667 0.166666667 0.166666667 0.166666667 0.166666667
BPCL 0.16666667 0.135% 0.005% -0.001% 0.003% 0.018% 0.006%
JSW 0.166666667 0.005% 0.358% 0.006% 0.001% 0.006% 0.001%
GAIL 0.166666667 -0.001% 0.006% 0.053% 0.000% 0.008% 0.007%
ITC 0.166666667 0.003% 0.001% 0.000% 0.062% -0.010% 0.006%
IOCL 0.166666667 0.018% 0.006% 0.008% -0.010% 0.134% 0.007%
HAVELLS 0.166666667 0.006% 0.001% 0.007% 0.006% 0.007% 0.035%
CONT TO VARIANCE 0.000046063 0.000104382 0.000020291 0.000017034 0.000045182 0.000016948
WEIGHT TOTAL 1
PORTFOLIO RETURN 0.0134%
PORTFOLIO SD 1.5808%
EST SHARPE RATIO 0.034405939

20. WITH MAXIMISATION
COMPANY BPCL JSW GAIL ITC IOCL HAVELLS
WEIGHT 0 0 0.14276045 0 0.080269404 0.776970146
BPCL 0.000000000 0.135% 0.005% -0.001% 0.003% 0.018% 0.006%
JSW 0 0.005% 0.358% 0.006% 0.001% 0.006% 0.001%
GAIL 0.14276045 -0.001% 0.006% 0.053% 0.000% 0.008% 0.007%
ITC 0 0.003% 0.001% 0.000% 0.062% -0.010% 0.006%
IOCL 0.080269404 0.018% 0.006% 0.008% -0.010% 0.134% 0.007%
HAVELLS 0.776970146 0.006% 0.001% 0.007% 0.006% 0.007% 0.035%
CONT TO VARIANCE 0.000000000 0.000000000 0.000019517 0.000000000 0.000013704 0.000225052
WEIGHT TOTAL 1
PORTFOLIO RETURN 0.15%
PORTFOLIO SD 1.61%
EST SHARPE RATIO 0.121775133

22. OBTAINED RESULTS !!!
AVERAGE DAILY PORTFOLIO RETURNS:
0.000476 0.000532
0.000134
0.002713
0.001443
0.001547
0.000667
0.000354 0.000362
2014-15 2015-16 2016-17
EQUAL WEIGHT SHARPE RATIO OPTIMISATION ESG

23. EXPECTED ANNUALIZED RETURNS !!!
19%
21%
5%
28%
14% 14%
2014-15 2015-16 2016-17
Expected Annualized Returns
EQUAL WEIGHT ESG

24. EXPECTED STANDARD DEVIATIONS !!
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
2014-15 2015-16 2016-17
EQUAL WEIGHT SHARPE RATIO OPTIMISATION ESG

25. ANY DEVELOPMENTS IN INDIAN
PERSPECTIVE YET ??
 ON AUG 2012 SEBI MANDATED PUBLISHING BUSINESS RESPONSIBILITY REPORTS
ALONG WITH THE ANNUAL REPORTS OF THE COMPANY.
 SEBI HAS BEEN WORKING TOWARDS INCREASING THE IMPORTANCE OF
SUSTAINABILITY REPORTING.
 SEBI HAS PASSED A RESOLUTION ON 24th NOV 2014 REQUIRING THE LARGEST
BUSINESS HOUSES TO DESCRIBE MEASURES TAKEN TOWARDS SOCIAL AND
ENVIRONMENTAL ISSUES
 S&P ESG INDEX WAS LAUNCHED IN 2008, THE FIRST INDEX OF COMPANIES
WHOSE BUSINESS STRATEGIES AND PERFORMANCES DEMONSTRATE A HIGH
LEVEL OF COMMITMENT TOWARDS MEETING ESG STANDARDS

26.  IT IS CLEAR THAT THERE ARE SUBSTANTIAL REASONS TO BELIEVE THAT ESG
DIMENSION MATTERS.
 THE PROBLEMS SUCH AS NON AVAILABILITY OF DATA AND NON STANDARDIZED
METHODOLOGIES RESTRICTS THE WAYS FOR ITS WIDE RANGE APPLICATION
 THERE ARE HANDFUL PROVIDERS OF USEFUL DATA REGARDING ESG
INFORMATION, TO BE PRECISE SUSTAINALYTICS AND MSCI ARE THE MOST
REPUTED AND ONLY DATA SOURCE OF SUSTAINABILITY RANKINGS.
 BUT THE PROBLEM OF MATERIALITY STILL LIES AS THE USAGE REQUIREMENT OF
DATA CHANGES FROM INVESTOR TO INVESTOR AND REQUIRES LOTS OF DATA
MANIPULATION
 IN THE END IT IS QUITE OBVIOUS THAT THERE SHOULD BE
MORE EMPHASIS ON THE ESG DIMENSIONS IN INDIAN
PERSPECTIVE SO THAT COMPARABILITY BETWEEN
DIFFERENT SECURITIES COULD BE HELD ON ALL ASPECTS.