ESG Is a Priced Risk Factor in BRICS Markets, Major Asset Pricing Study Finds

For more than a decade, one of the most contested questions in finance has been deceptively simple: does a company’s environmental, social and governance performance actually show up in its stock returns, or is ESG merely a marketing veneer that markets politely ignore? A new peer-reviewed study published in Discover Sustainability by Dusmanta Karkaria of the Indian Institute of Management Amritsar, Karthika V R of Pondicherry University, and Shiba Prasad Mohanty of Symbiosis International University offers some of the most rigorous evidence yet that the answer depends heavily on where you look. Analyzing nearly a decade of data from the BRICS economies—Brazil, Russia, India, China and South Africa—the researchers find that ESG behaves, at least in part, like a genuine priced risk factor rather than a statistical curiosity.

The study, spanning April 2015 to December 2024, addresses a methodological gap that has plagued earlier attempts to link sustainability scores with returns. Many prior studies simply correlated ESG ratings with stock performance, a approach vulnerable to confounding by well-known return drivers such as firm size, valuation and profitability. Karkaria and colleagues instead embedded ESG directly into the workhorse frameworks of modern empirical finance: the Fama–French three-factor and five-factor models, which explain stock returns through market exposure, size, value, profitability and investment factors. By augmenting these models with a dedicated ESG factor, the authors could test whether sustainability information carries explanatory power beyond everything mainstream asset pricing already accounts for.

The construction of the ESG factor itself followed the characteristic-based portfolio approach that has become the gold standard since Fama and French popularized it in the early 1990s. Stocks within each BRICS market were sorted into portfolios based on their ESG characteristics, and the return spread between high-ESG and low-ESG portfolios became the factor’s empirical return series. This design matters because it converts a subjective rating into a tradable return stream—precisely the kind of object that asset pricing theory is built to evaluate. If that spread earns a persistent premium that standard factors cannot explain, financial economists have good reason to treat ESG as a distinct dimension of risk or mispricing rather than noise.

The statistical tests the authors deployed are the field’s harshest judges. The Gibbons, Ross and Shanken F-statistic, a classical test of whether a multifactor model’s pricing errors are jointly zero, evaluated whether augmented models outperformed the standard ones. Spanning tests asked an even more pointed question: can the existing Fama–French factors fully reproduce, or ‘span,’ the returns to the ESG factor? If ESG returns were spanned, they would contain no information beyond size, value, profitability, investment and the market itself. The spanning tests rejected that proposition, confirming that ESG returns are not fully absorbed by the conventional factor zoo. Factor-loading estimates and Sharpe ratio comparisons across model specifications pointed in the same direction, consistent with ESG carrying a priced risk premium in these markets.

Perhaps the most striking findings emerged from the cross-country analysis, which revealed heterogeneous rather than uniform patterns of ESG pricing across the BRICS bloc. Within each market, portfolios of low-ESG firms displayed significantly negative loadings on the ESG factor, while high-ESG portfolios showed significantly positive loadings—a clean, internally consistent signature that ESG characteristics divide firms along a priced dimension. The effect was most pronounced in Brazil and China, suggesting that in these economies sustainability disclosures convey information that investors meaningfully price. In Brazil, decades of environmental regulation and deforestation-related scrutiny have made ecological performance a salient business risk, while China’s state-driven push toward green finance and carbon intensity targets has similarly sharpened investor attention to ESG profiles.

The study also uncovered a subtle substitution effect with implications for how sustainable investing frameworks are built in emerging markets. In India and China, the ESG factor effectively substituted for the investment factor of the five-factor model—the component that captures differences in firms’ asset growth and investment aggressiveness. In practical terms, ESG information in those two markets appears to encode some of the same economic content that investment patterns otherwise capture, perhaps because conservatively managed, low-growth firms are also those with stronger governance and sustainability commitments. Across all five markets, however, ESG augmented the five-factor model, adding explanatory power even where full substitution did not occur.

Why should these results matter beyond the seminar room? Trillions of dollars in institutional capital now flow through ESG-screened mandates, and the academic controversy over whether ESG investing sacrifices, enhances, or leaves unchanged returns remains unresolved, particularly for emerging markets where disclosure standards and enforcement vary widely. The BRICS economies represent a critical test bed: they combine rapid industrialization, evolving regulatory regimes, and increasingly sophisticated capital markets. If ESG is a priced factor there, then asset managers constructing portfolios for these regions are implicitly taking or hedging ESG risk whether they intend to or not, and mean-variance optimization that ignores the factor may be quietly mis-specified.

The market-dependent nature of the findings is itself a contribution. Much of the ESG-finance literature, dominated by US and European data, implicitly assumes that results generalize across geographies. This study’s evidence that ESG pricing relevance in BRICS asset markets is contingent rather than universal cautions against transplanting conclusions from developed markets. It also gives sustainable-investment practitioners a map of where ESG integration is most likely to improve portfolio efficiency—and where it may add cost without commensurate information value. The authors frame this as insight into where and how ESG integration meaningfully improves sustainable investing frameworks across these heterogeneous economies.

Methodologically, the paper’s triangulated evidence—GRS tests for model completeness, spanning regressions for factor redundancy, factor-loading significance, and out-of-sample-style Sharpe ratio comparisons—represents a template that future studies of other emerging regions can adopt. The decade-long window captures a period of dramatic change in ESG disclosure: the rise of mandatory sustainability reporting in parts of Asia, the growth of global ESG data providers, and the post-2015 surge in climate-related investor pressure following the Paris Agreement. That the ESG factor retained incremental pricing power through this evolving landscape strengthens the case that its effects are structural rather than transient.

Limitations and open questions remain, as the authors acknowledge through their careful framing. ESG ratings from different providers correlate imperfectly, and disclosure-based scores may reflect what firms report rather than what they do—a concern amplified in markets with weaker disclosure enforcement. The authors’ published version, released as open access under a Creative Commons license and citable through its permanent DOI, invites replication across other emerging-market blocs and with alternative ESG data sources. Still, the central message stands: in the BRICS world, sustainability information is not financial decoration. It loads onto returns in statistically significant, economically interpretable ways, and any serious account of asset pricing in these rapidly growing economies now has to reckon with ESG as a factor in its own right.

Subject of Research: Whether ESG disclosures function as a priced risk factor in asset pricing models across BRICS equity markets

Article Title: Nexus between ESG disclosures and asset pricing efficiency in BRICS markets

Article References: Dusmanta, K., V R, K., & Mohanty, S. P. (2026). Nexus between ESG disclosures and asset pricing efficiency in BRICS markets. Discover Sustainability. https://doi.org/10.1007/s43621-026-04712-6

Image Credits: AI Generated

DOI: 10.1007/s43621-026-04712-6

Keywords: ESG, asset pricing, BRICS markets, Fama–French models, sustainable investing, emerging markets, risk premium, portfolio returns, factor models, sustainability, capital markets, financial economics