ESG sentiment and its impact on stock market return

Abstract

This article investigates the connection between financial market performance and investors' attitudes toward environmental, social, and governance (ESG) issues. Using the top-down approach of Baker and Wurgler (2007), the study constructs an ESG index for chosen countries. The research used principal component analysis to build a composite ESG index using appropriate proxies. The ESG and return series' integration level is stationary using the ADF unit root test, which eliminates other selected nations except for India because India's stock return and ESG series were only integrated in the order I(0) and I(1). Error correction reveals that only the return lag that justifies significance occurs at a level of 10% for the short-run coefficient and at a level of 1% for the long-run adjustment, indicating that 179% each year corrects the disequilibrium induced by the temporal shocks of the previous period. This finding suggests that the ESG index is in long-run equilibrium with market performance.