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.
