Nexus between ESG disclosures and asset pricing efficiency in BRICS markets

Abstract

This study investigates whether the Environment, Social, and Governance (ESG) factor serves as a priced risk factor in explaining the portfolio returns of asset pricing models across the BRICS markets. Utilizing a characteristic-based portfolio construction approach, the study integrates ESG into standard asset pricing models such as Fama–French Three and Five Factor models, along with augmented and substitution factors, evaluating model performance using Gibbons, Ross and Shanken (GRS) F-statistic, spanning tests, and Sharpe ratio comparison over the period from April 2015 to December 2024. The empirical findings reveal that the ESG factor provides significant incremental explanatory power across BRICS markets. The spanning test confirms that ESG returns are not fully spanned by the existing FF factors, and factor-loading and Sharpe-ratio evidence are consistent with ESG carrying a priced risk premium. The cross-country analysis reveals heterogeneous patterns in ESG pricing: low-ESG portfolios show significantly negative ESG loadings, while high-ESG portfolios show significantly positive loadings within each market, with the most pronounced loadings observed in Brazil and China. Further, the results indicate that the ESG factor augments the existing five-factor model across all markets and effectively substitutes for the investment factor in India and China. The study provides evidence that the pricing relevance of ESG in BRICS asset markets is market-dependent rather than universal, offering insight into where and how ESG integration meaningfully improves sustainable investing frameworks across these heterogeneous economies.