ESG Ratings in India: Assessing Their Reliability for Investment Decisions

Abstract

This study aims to evaluate the reliability of ESG ratings in making investment decisions. By analyzing the relationship between asset class concentration and ESG ratings, this study determines the extent to which investors rely on these ratings for profitable investment outcomes. For this study, the ESG mutual fund rating provided by CRISIL[1] for the years 2022-23 was considered. Portfolio performance metrics, risk-reward, and portfolio selection ratios were calculated for these funds. A comparative analysis using a Kendal t-test was performed to measure the differences between CRISL ratings and performance metrics outcomes to determine if the variations were statistically significant. The study offers insights into the sustainability practices of mutual funds and shows that there is no correlation between traditional performance metrics and ESG ratings. While some highly ESG-rated funds outperformed their peers, others lagged in standard performance indicators, underscoring the ratings' complex nature. While good ESG performance can increase financial outcomes, there is a caveat. Companies often adopt ESG practices to mask business performance leading to a trade-off with genuine financial gains. These ratings are informative, but investors should also weigh traditional metrics to achieve sound financial returns.