Behavioural Finance

Research paper on “Impact of behavioural factors on ESG investing”

Group-1
NAME SAP ID
Aniket Garg 80012200597
Gaurav Kumar 80012200032
Kushagra 80012200895
Debjyoti Das 80012200066
Muskan verma 80012200201
 Impact of ESG on Companies
Abstract:
Investors and stakeholders care about ESG data because it impacts financial
performance. They have always been concerned about governance performance
and assessing how well companies are run but over the past several years
environmental and social performance have become increasingly more
financially material. Materiality, in the context of environmental, social, and
corporate governance (ESG), has become an area of great focus over the last
decade and progress has been made in understanding its significance to asset
valuation. A 2015 study from Harvard Business School was the first to present
significant evidence that sustainable investment strategies outperform overall
strategies if investors are assessing material matters. In recent years,
institutional investors and pension funds have grown too large to diversify away
from systemic risks, forcing them to consider the environmental and social
impact of their portfolios. A 2022 outlook report from Bloomberg Intelligence
says that pressure will both on companies and governments to step up efforts to
build a more sustainable and equitable future.

Introduction:
An increasing number of investors are concerned about unsustainable human
activities that have generated threats such as climate change, growing
inequality, governance scandals, biodiversity, deforestation, human rights
violation and disruption to food and fresh water supplies.
ESG, or environmental, social, and governance factors, is criteria used by
socially conscious investors to screen investments for social responsibility.
The “E” in ESG refers to a company’s environmental stewardship, which
includes how it manages the environmental effects of its operations.
Environmental factors impact issues such as climate change, global warming,
pollution, and a rising sea level. Some metrics investors use to analyse
environmental issues include greenhouse gas emissions, water use, and energy
consumption.
The” S” stands for social factors, such as company’s support for its employees
and how well it serves stakeholders. This includes health and safety, human
capital development, and the impacts the company has on surrounding
stakeholders in the community. To analyse social issues, investors look at
metrics like accident and fatality rates.
The “G” stands for Corporate Governance and considers the effectiveness and
independence of the board structure, executive compensation, and accounting
management. To analyse governance issues, investors look at metrics like board
diversity and sustainability policies.

ESG Metrics:
These are non-financial metrics that allows businesses to measure their
environmental, social, and governance performance. it is essentially another
way to assess a company other than by just looking at financial statements like
balance sheets or income statements to see how they impact society and planet
at large. ESG metrics can provide key insights into important matters such as
how companies limit waste of natural resources, how they treat their employees,
and whether their management structure encourages effective governance
practices and accountability.
Companies that are more transparent about ESG performance and that disclose
more ESG metrics help investors better understand their ESG progress.
ESG has moved from niche to mainstream to mandatory, profoundly reshaping
the financial industry. Scrutiny will play an important role as regulators tackle
the risk of ‘greenwashing’ or of providing misleading information about how a
company’s products are more environmentally or socially around.
Review of Literature:
Environmental, Social and Governance (ESG) investing has gained significant
traction in recent years as investors increasingly seek to align their financial
goals with their values and broader societal and environmental concerns.
Several studies have been conducted to analyse the impact of ESG on
companies and investors.
Friede, G., Busch, T., & Bassen, A. (2015). ESG and financial performance:
aggregated evidence from more than 2000 empirical studies examines the
relationship between Environmental, Social, and Governance (ESG) factors and
financial performance across over 2000 empirical studies. The authors find a
positive correlation between ESG performance and financial returns, supporting
the notion that integrating ESG factors can enhance risk-adjusted returns across
various asset classes and geographies.
Eccles, R. G., Ioannou, I., & Serafeim, G. (2014). The impact of corporate
sustainability on organizational processes and performance explores the
impact of corporate sustainability on organizational processes and performance.
They highlight the importance of integrating sustainability into corporate
strategy, operations, and reporting to drive long-term value creation. The study
underscores the materiality of ESG factors in mitigating risks and enhancing
financial performance.
Gormsen, N. J., & Fahlenbrach, R. (2017). ESG shareholder engagement
and downside risk. Gormsen and Fahlenbrach investigate the impact of ESG
shareholder engagement on downside risk. Their study suggests that active
engagement with companies on ESG issues can reduce downside risk and
improve long-term financial performance. The findings highlight the role of
investor stewardship in promoting corporate sustainability practices and
enhancing shareholder value.
Flammer, C. (2015). Does corporate social responsibility lead to superior
financial performance? A regression discontinuity approach.
Flammer investigates the relationship between corporate social responsibility
(CSR) and financial performance using a regression discontinuity approach. The
study finds evidence of a positive association between CSR engagement and
financial performance, particularly for firms with strong stakeholder
relationships. The findings contribute to the ongoing debate on the business case
for CSR and sustainable investing.
Grewal, J., Kalish, S., Chittumalla, A., & Obuszewski, A. (2020).
Regulation and sustainable investing examine the impact of regulatory
interventions on sustainable investing. Their study investigates how regulatory
developments, such as the European Union's Sustainable Finance Action Plan,
influence ESG integration and corporate behaviour. The findings highlight the
importance of supportive regulatory frameworks in advancing the goals of
sustainable finance and responsible investment.
Dimson, E., Karakas, O., & Li, X. (2015). Active ownership explores the
concept of active ownership and its impact on corporate behavior and financial
performance. The study examines the effectiveness of shareholder engagement
in promoting sustainable business practices and enhancing shareholder value.
The findings underscore the role of engaged investors in driving positive ESG
outcomes and long-term value creation.
Hong, H., & Kacperczyk, M. (2009). The price of sin: The effects of social
norms on markets in which Hong and Kacperczyk investigate the impact of
social norms on markets, particularly regarding "sin" industries. The study
explores how social attitudes towards certain industries, such as tobacco and
alcohol, influence market outcomes. While not directly related to ESG
investing, the findings contribute to understanding the broader societal
implications of investment decisions and ethical considerations in financial
markets.
Khan, M. S., Serafeim, G., & Yoon, A. (2020). Corporate sustainability:
First evidence on materiality which provides empirical evidence on the
materiality of corporate sustainability. Their study examines the relationship
between sustainability performance and financial materiality using a large
sample of firms. The findings suggest that ESG factors are material for investors
and have a significant impact on financial performance, underscoring the
importance of ESG integration in investment decision-making.
Serafeim, G. (2018). Corporate sustainability: A strategy? examines
corporate sustainability as a strategic imperative. He argues that sustainability
should be integrated into corporate strategy to drive innovation, mitigate risks,
and enhance long-term competitiveness. The article emphasizes the importance
of measuring and managing ESG factors to create shared value for corporations
and society.
Aims and Objectives:
Analyse the impact of behavioural factors in ESG investing among Indian
Investors
Research Methodology:
During our research, we collected data from a sample of participants of different
age groups which allows us to examine attitudes, perception, and experiences
related to ESG investing among investors. The sample is drawn from a diverse
population of investors, including investors from different age groups, genders,
education levels, employment statuses and income brackets. The questionnaire
has been floated using google form from which both qualitative and quantitative
is collected. The questionnaire will be pre-tested with a small group of
participants to ensure clarity, relevance, and reliability. The analysis will focus
on behavioural factors of humans that impact their decision to do ESG investing
or not.
Quantitative data will be further analysed using statistical software “R-
Programming”, to calculate descriptive statistics and conduct inferential
analyses. Measures are taken to ensure the validity and reliability of the
questionnaire, including pilot testing, using validated scales, etc.
We will be analysing whether an investor’s ESG investing decision is
influenced by his age, gender, background, and annual income. This analysis
will be done through:
 Regression
 Confusion Matrix
 Logit Model

Through these methods, we will be able to find the degree of correlation,

significance level of each variable on ESG investing. There will be several
assumptions that will be taken into consideration before running the analysis of
the data.
Before moving on to the correlation analysis, let us first analyse the responses
received from the questionnaire.
Data Analysis:
1. Gender:

In our questionnaire we have responses from 53.45% males and 46.55%

females through which we can evenly analyse the influence of gender on
ESG investing.

2. Education Background:

From the above pie-chart we can infer that in our sample data 36.21% of
the total have done post-graduation and 63.79% have done graduation,
which shows that are sample is inclined towards people who are earning
after doing under-graduation only.
3. Income Level:

For analysis purpose, we have segregated income into two groups: high
income and low income. High income are the members having annual
income of more than Rs 25,00,000 which are 53.45% in our dataset and
low income are the members having annual income of less than Rs
25,00,000 which are 46.55%.

4. Awareness about ESG:

To understand the behavioural sense of human being in ESG investing,

we have started with the awareness factor that whether they are aware of
the ESG investing or not. We found that 63.79% of the people in our
dataset were about the ESG investing and 36.21% lacks knowledge of
ESG.
5. Knowledge level:

We tested the knowledge level of individuals using a scalar method from

1 to 5, People rating themselves more than 3 are having high knowledge
about ESG and those lower than 3 are individuals having low knowledge
about ESG investing. In our sample size, 63.79% of the population has
low knowledge about ESG investments and 36.21% of the population
have high knowledge. Later, we will be analysing the impact of
knowledge level on decision to do ESG investing.

6. Preference:

We have asked the population regarding their preference about whether

they prefer sustainable investments or profitable investments. Therefore,
we found out that 65.52% of the sample prefers profitability over
sustainability with just 34.48%; which shows the significant gap between
investing for sustainability or profitability.
 7. ESG Investing:

From our sample size, we found out that 51.72% of the participants are
not investing in accordance with the ESG principles and 48.28% of the
people invest while taking ESG principles into the consideration.

Our main objective is to find whether behavioural factors affect an individual’s

decision to invest in accordance with ESG principles among Indians.
Since, we are dealing with the qualitative data, we will be converting the
variables into binary numbers for regression purpose.
Factor_1: Gender
“1” has been assigned to Male
“0” has been assigned to female
Factor_2: Marital Status
“1” for married
“0” for unmarried
Factor_3: Education Level
“1” for under-graduation
“0” for post-graduation
Factor_4: Income Level
“1” for high income
“0” for low income
Factor_5: Awareness
“1” people are aware
“0” people are not aware
Factor_6: Knowledge Level
“1” for High knowledge
“0” for low knowledge
Factor_7: Preference
“1” for Sustainability
“0” for Profitability
Factor_8: ESG Principles
“1” for investing with ESG principles
“0” for not investing with ESG principles
Factors number for 1 to 7 will be considered as independent variables and
factor_8 will be considered as dependant variable to run the regression using
logit model. We will also be finding accuracy, specificity, and sensitivity of our
model.
Regression Analysis:
Table 1.1
Coefficients:
Intercept Gender Marital Education
0.3096 1.3088 0.2695 -1.9805

Income Awareness Knowledge Preference

-0.4553 -0.1735 -0.4956 1.4409

Using R-programming, we have run an analysis using logit model and these
were the coefficients that came out. These coefficients are not depicting much
about the percentage change in decisions regarding ESG investments by several
behavioural factors.

To get an accurate analysis and effect of behaviour factors on ESG investments,

we will find the average marginal effect of our model.
The average marginal effect (AME) is a statistical concept used primarily in
econometrics and related fields to measure the average change in the dependent
variable resulting from a one-unit change in an independent variable of interest,
while holding all other variables constant. It is particularly useful in models
where the independent variables are not continuous, but rather categorical or
binary.
Table 1.2
Average Marginal
Effect:
Intercept Gender Marital Education
5.715359 24.163865 4.9754 -36.5648

Income Awareness Knowledge Preference

-8.405 -3.2034 -9.150445 26.6021

Interpretation:
Intercept: it represents that value of the dependent variable when all
independent variables are zero. In some of the cases they may not have a direct
meaningful interpretation but serves as a baseline reference point.
Gender: a coefficient of 24.16 suggests that, on average, there is a positive
relationship between the gender variable and the dependent variable.
Specifically, for every one-unit increase in the gender variable, the expected
value of the dependent variable being investing in accordance with ESG
principles increases by 24.16 times.
Marital Status: with a coefficient of 4.98, this suggests a positive relationship
between the marital status and the dependent variable. For every one-unit
increase in the marital status, the expected value of the dependant variable
increases by approximately 4.98 times.
Education: the coefficient of -36.56 indicates a negative relationship between
education and ESG investments. For every one-unit increase in Education, the
expected value of the dependent variable decreases by 36.56 times.
Income: The coefficient of approximately -8.41 suggests a negative relationship
between income and ESG investments. For every one-unit increase, the
expected value of ESG investments will decrease by 8.41 on average.
Awareness: With a coefficient of approximately -3.20, there is a negative
relationship between awareness and the ESG investments. For every one-unit
increase in awareness, the expected value of the ESG investments decreases by
approximately 3.20 on average.
Knowledge: This coefficient of approximately -9.15 indicates a negative
relationship between knowledge and the ESG investments. For every one-unit
increase in knowledge, the expected value of the ESG investments decreases by
approximately 9.15 on average.
Preference: With a coefficient of approximately 26.60, there is a positive
relationship between Preference and the ESG investments. For every one-unit
increase in Preference, the expected value of the ESG investments increases by
approximately 26.60 on average.
Confusion Matrix:
A confusion matrix is a table used to evaluate the performance of a
classification model. It presents a summary of the predicted versus actual
classifications made by the model on a dataset. The matrix is especially useful
when dealing with binary classification problems, where the outcome can be
classified into two categories (e.g., "positive" and "negative").
Components of Confusion matrix:
1. True Positives (TP):
 True Positives are the cases where the model correctly predicts the
positive class
 For example, in a medical diagnosis scenario, a true positive would occur
when the model correctly identifies a patient with a disease as positive.

2. True Negatives (TN):

 True Negatives are the cases where the model correctly predicts the
negative class.
 Continuing with the medical diagnosis example, a true negative would
occur when the model correctly identifies a healthy patient as negative.

3. False Positives (FP):

 False Positives are the cases where the model incorrectly predicts the
positive class.
 In the medical diagnosis scenario, a false positive would happen when the
model incorrectly identifies a healthy patient as having the disease.

4. False Negatives (FN):

 False Negatives are the cases where the model incorrectly predicts the
negative class.
 For instance, in medical diagnosis, a false negative would occur when the
model incorrectly identifies a patient with the disease as healthy.
Confusion matrix from our analysis of impact of behavioural factors on ESG
investments among Indian Investors.
Table 1.3
Confusion Matrix
0 1
FALSE 25 10
TRUE 5 15

This is the confusion matrix that we have after the analysis:

True Positive (TP): 15 implies the times the model predicted that event happen
when it happened.
True Negative (TN): 25; implies that the event did not happen and the model
also predicted 25 times that the event did not occur.
False Positive (FP): 10; implies that the 10 times the model predicted that the
event did not occur when it occurred.
False Negative (FN): 5; implies that the model predicted that event happened
when it did not actually occur.

To get a more comprehensive assessment of the model’s performance and its

sustainability for the intended task, we will be finding accuracy, precision, recall
(sensitivity), specificity, F1 score, and false positive rate.
1. Accuracy:
Accuracy measures the proportion of correct predictions made by the
model across all classes.
Accuracy = (TP + TN) / (TP + TN + FP + FN)

2. Precision:
Precision measures the proportion of true positive predictions out of all
positive predictions made by the model.
Precision = TP / (TP + FP)

3. Recall (Sensitivity):
Recall measures the proportion of true positive predictions out of all
actual positive instances in the dataset.
Recall = TP / (TP + FN)
 4. Specificity:
Specificity measures the proportion of true negative predictions out of all
actual negative instances in the dataset.
Specificity = TN / (TN + FP)

5. F1 Score:
The F1 score is the harmonic mean of precision and recall and provides a
balance between the two metrics.
F1 Score = 2 * (Precision * Recall) / (Precision + Recall)

6. False Positive Rate (FPR):

FPR measures the proportion of false positive predictions out of all actual
negative instances in the dataset.
FPR = FP / (FP + TN)
Here are the results from our analysis:
Table 1.4
Accuracy Precision Sensitivity
0.74139 0.64285 0.7826

Specificity F1 Score FPR

0.71428 0.70612 0.28571

 Accuracy: Approximately 74.1% of the model's predictions are correct

across all classes.
 Precision: Out of all the instances predicted as positive, approximately
64.3% are truly positive.
 Sensitivity (Recall): The model correctly identifies approximately 78.3%
of the actual positive instances.
 Specificity: The model correctly identifies approximately 71.4% of the
actual negative instances.
 F1 Score: The harmonic mean of precision and recall is approximately
70.6%, providing a balanced measure of the model's performance.
 False Positive Rate (FPR): Approximately 28.6% of actual negative
instances are incorrectly predicted as positive by the model.
Conclusion:
In conclusion, this research highlights the impact of behavioural factors on ESG
investing and emphasizes the importance of understanding investor behaviour in
sustainable finance. By recognizing the influence of cognitive biases, individual
preferences, and social dynamics, investors can make more informed and
effective ESG investment decisions. The findings contribute to advancing the
field of sustainable finance by providing insights into the behavioural
dimensions of ESG investing and informing strategies to promote responsible
investment practices.
References:
 https://portal.bloombergforeducation.com/
 https://www.forbes.com/advisor/investing/esg-investing/
 https://www.cfainstitute.org/en/rpc-overview/esg-investing
 https://www.investopedia.com/terms/e/environmental-social-and-
governance-esg-criteria.asp
 https://www.lawinsider.com/dictionary/behavioural-
factors#:~:text=Behavioural%20factors%20means%20many%20different
,of%20a%20load%20of%20washing.