Does ESG Performance Shape Volatility Asymmetry? Evidence from Indian Listed Firms

Abstract

This study examines whether corporate Environmental, Social, and Governance (ESG) performance is associated with systematic differences in stock return volatility dynamics, extending the predominantly level-based ESG-financial performance literature into the domain of dynamic risk behaviour. Using daily adjusted closing prices for 27 firms listed on Indian stock exchanges with ESG scores ranging from 33 to 78, this study fits a grid of GARCH(1,1), EGARCH(1,1), and GJR-GARCH(1,1) specifications, each paired with Gaussian Normal, Student's t, and Skewed Student's t innovations, and selects the best-fitting model per firm by Akaike Information Criterion (AIC). The final sample was drawn from an original 30-firm frame (a Top 15 and Bottom 15 ESG-rated design); one duplicate entry and two firms with incomplete data were removed, yielding the 27-firm analytical sample. The resulting volatility coefficients are merged with firm-level ESG scores and financial ratios (return on equity, return on assets, gross profit margin, dividend yield, price-to-earnings ratio, relative strength index, and market beta) into a nine-variable feature matrix. Principal Component Analysis reduces this matrix to five components explaining approximately 80 percent of total variance, and K-Means clustering (k = 2, selected by silhouette score) groups firms into two clusters that do not differ significantly in mean ESG score (F = 1.34, p = 0.26). The central finding is that ESG score is negatively associated with the leverage-effect coefficient (r = -0.26), a direction consistent with the stakeholder-theoretic literature; the association is modest in size and does not reach statistical significance at conventional thresholds in this 27-firm sample (p = 0.23). The study's clearest and most robust results are that asymmetric volatility models dominate this sample regardless of ESG standing, and that volatility persistence is uniformly high across nearly all firms. Taken together, the evidence is directionally consistent with ESG performance being associated with a smaller leverage effect in this sample, though the relationship is not statistically confirmed at this sample size. Directions for confirmatory panel-based research with a larger sample and a time-varying ESG measure are proposed.