Echoes of Sentiment: Unraveling the Impact of Market Psychology on the ESG Index in India

Abstract

Environmental, Social, and Governance (ESG) investing has gained prominence as investors increasingly consider sustainability factors alongside financial returns. This study explores the relationship between market sentiments and the performance of the NIFTY100 ESG Index in India. Employing monthly data from August 2012 to February 2024, market sentiments are proxied by the Business Confidence  Index,Consumer Confidence Index, and India VIX, with exchange rates and interest rates as control variables. Using the Autoregressive Distributed Lag (ARDL) model in EViews 9, the findings reveal the presence of overconfidence bias among investors. ESG stocks are often perceived as safe-haven assets due to strong government backing, leading to reduced risk perception. However, during periods of heightened optimism, investors shift toward riskier assets, whereas declining confidence increases the preference for ESG investments. Notably, rising market uncertainty prompts investors to liquidate ESG holdings in favor of ultra-safe assets like bonds. Additionally, currency appreciation and high interest rates exert a significant negative impact on the ESG index. It conveys that Indian investors prioritize portfolio returns over sustainability. These insights contribute to understanding the behavioral dynamics influencing ESG investing in emerging markets, offering valuable implications for policymakers and investors.