The financial cost of ESG investing in the Johannesburg Stock Exchange (JSE)

Abstract

ESG investing, through the theme of Principles of Responsible Investing, is widely gaining popularity and acceptance by investors globally and in South Africa. The increase in ESG investing opportunities has resulted in critical viability and economic value-add questions in the investment fraternity. An opportunity has become available for ESG rating agencies to prepare and provide ESG ratings for investment purposes. The process impacts investees, firms in this case. The investors require clarification and certainty regarding the financial costs and benefits of ESG investing in JSE. The study aimed to determine the financial cost of ESG investing in the JSE. The study was divided into two parts. Firstly, the study investigated if a high ESG rating offered better financial returns than a low ESG rating portfolio. Secondly, the study investigated if a high ESG rating performed better than the benchmark market portfolio, the All Share Index. Thirdly, the study examined if ESG rating data from two different ESG data providers translated to the same financial returns in the JSE. Lastly, the study investigated if ESG rating data from two different agencies correlated in the JSE. Using ESG data from Refinitiv and Bloomberg, the analysis was based mainly on the graphical time series technique and supported with statistical tests. The study found that a high ESG rating portfolio performed poorly compared to a low ESG portfolio. The high ESG rating portfolios outperformed the All Share Index from 2015. The financial returns from ESG data of Refinitiv and Bloomberg tracked differed. Finally, the ESG rating data from Refinitiv and Bloomberg exhibited a moderate to strong correlation. Accordingly, recommendations and future research work are provided and detailed in the report.