Corporate environmental performance and stock market performance: Indian evidence on disaggregated measure of sustainability

• Date: 01 July 2020
• DOI: http://doi.org/10.1002/jcaf.22444
• Author: Vanita Tripathi,Juhi Jham
• Published date: 01 July 2020

BLIND PEER REVIEW

Corporate environmental performance and stock market

performance: Indian evidence on disaggregated measure

of sustainability

Vanita Tripathi

1

| Juhi Jham

2

1

Department of Commerce, Delhi School

of Economics, University of Delhi, New

Delhi, India

2

Shaheed Rajguru College of Applied

Sciences for Women, University of Delhi,

New Delhi, India

Correspondence

Vanita Tripathi, Department of

Commerce, Delhi School of Economics,

University of Delhi, B-7/74-75 Sector

11 Rohini, New Delhi, India.

Email: vanitatripathi.dse@gmail.com

Juhi Jham, Shaheed Rajguru College of

Applied Sciences for Women, University

of Delhi, B-7/74-75 Sector 11 Rohini, New

Delhi, India.

Email: juhi9294@gmail.com

Abstract

The study addresses the emerging needs of green investing as it believes that

the firms that are better equipped with mitigating and adapting climate change

and its associated risk also perform better in the market. The construct of supe-

rior performance is based on the models linking environmental performance

and financial performance in the literature. It aims to validate if those firms

that are better equipped with adapting toclimatechangegeneratesuperioror

equivalent market return as compared to blue chip firms, socially responsible

firms, and general market portfolio. It further examines if market values dis-

aggregated measure of sustainability, that is, environmental performance differ-

ently from others. Results of the study are consistent with the theoretical wor k

suggesting that green investing is reflected in demand differences between green

and nongreen stocks. It also establishes a link between alpha's and green

investing. The results show that all green portfolios outperformed market at 1%

significance level over 12-year period and various subperiods. Results also indicate

that investors of Indian stock market value pure green stocks more than those

stocks that are screened out based on the criteria of corporate governance,

employee relations, and other social factors along with environmental factor.

1|INTRODUCTION

Climate change is accelerating and it is a threat for real.

The rising temperature, increasing ocean water acidity,

rising sea levels, retreat of ice sheets and glaciers, and

increasing droughts and floods reflect increasing carbon

and greenhouse gases emission levels. Risks associated

with climate change are increasingly being recognized

world over. The financial risks emanating out of climate

change identified in literature are humungous. With the

burgeoning risks of climate change, it is evolving into a

behemoth. Increase in awareness and concern for climate

change among people worldwide has led to spurt of invest-

ment opportunities in green assets. The investors are

aligning investment in financial assets whose proceeds are

funding green projects like mitigation and adaptation

toward climate change, promoting responsible environ-

mental attitude. Investors have recently been seen investing

with nonpecuniary motives. They have become an impor-

tant participant in the energy and environmental transi-

tion. The drivers leading to their huge participation in

companies undertaking green initiatives can be attributed

tofinancialaswellasnonfinancialmotives.

Green investing is an emerging concept which means

investing in stocks of those companies that are better

equipped with adapting to climate change and mitigating

climate risk, the ones that are not harming the environ-

ment and creating a positive impact toward it. It comes

within the umbrella of socially responsible investing and

is a stock market solution to mitigate climate change by

Received: 23 January 2020 Accepted: 22 February 2020

DOI: 10.1002/jcaf.22444

76 © 2020 Wiley Periodicals, Inc. J Corp Acct Fin. 2020;31:76–97.wileyonlinelibrary.com/journal/jcaf

providing adequate source of finance to green initiatives

and rewarding the companies indulging in environmen-

tal corporate social responsibility. Boulatoff & Boyer

(2009) defines green investing as the act of investing in

companies havingpositive environmental impact. Mea-

suring environmental performance of a company is a

tedious task and more often than not managers grow

skeptical investing heavily in eco-friendly technologies.

Environmental management is increasingly seen as one

of the integral part of corporate sustainability along with

other dimensions.

In the western world, number of sustainability theme

funds and wealth managed under these funds has grown

significantly. Specifically in the United States, funds man-

aged under socially responsible mutual funds have risen

exponentially. There are global green theme indices, that

is, DAX Global Index, FTSE4Good Environmental

Leaders Europe 40 Index, S&P Global Eco Index, Wilder

Hill New Energy Global Innovation Index, S&P Global

Water Index, and FTSE KLD Global Climate Index using

screening and thematic approaches to build on green

portfolio. Green mutual funds have also started to gain

momentum and managers managing such funds strate-

gize investing in companies with good environmental

and financial performance achieving twofold aim. These

funds invest in climate or green-labeled bonds bridging

the financial deficit in the environmental sustainability

sector. Calvet Large Cap, Winslow Green Growth, and

Guinness Atkinson Alternative Energy are various large

and small cap mutual funds trading in Europe, screening

stocks with good reputation for environmental conscious-

ness. Fixed-income bond markets have very recently seen

the emergence of green-labeled bonds issued by various

supranational organizations, sovereign, and corporates

leveraging the green tag. European Investment Bank issued

Climate Awareness Bonds, U.S. Treasury issued “Green

Bonds,”SEB & Credit Suisse came up with World Bank

green bonds to support low-carbon development in develop-

ing countries. One major change in green finance happen-

ing round the world is issuing green bonds to finance

environmentally sustainable projects. Bonds that proceed

arecommittedtofinanceclimate-friendly projects, such as

renewable energy, green buildings, or resource conserva-

tion. Green bonds, defined by the International Capital

Markets Association, as “any type of bond instrument

where the proceeds will be exclusively applied to finance or

refinance, in part or in full, new or/and existing eligible

green projects.”The green bonds are identical to conven-

tional bonds. They are tradable fixed-income securities

under which the issuer owes the holders a debt and, condi-

tional on the terms under which the bond was issued, is

required to pay them interest and to redeem the principal at

a later date, denoted by the maturity date. They are labeled

as green because the issuer pledges to use the proceeds of

the bonds for environmental- or climate-focused activities

in accordance with sustainable development standards.

Green investing comes within the umbrella of proac-

tive investment strategies. A fund manager can deploy

multiple strategies to form a win–win green portfolio. He

may follow a passive strategy where a fund mirrors an

index movement or can employ an active strategy and

form the portfolio based on the predefined objectives. For

constructing an actively managed green fund, fund man-

agers many times outsource measurement of company's

carbon footprint and environmental performance to spe-

cialist analytical agencies, which increases the opera-

tional and management cost. The increase in cost should

be offset by being able to reap commensurate returns for

the funds. The fund managers should maintain efficient

asset allocation of the fund by maintaining broad diversi-

fication and considering its social value along with bench-

mark return. The United States, various European countries,

Mexico, among others have sought after Environmental,

Social, and Governance (ESG) funds and environment funds

in place to cater to green investors. Socially Responsible

Investing (SRI) has various strategies, namely, social screen-

ing, community investing, and shareholder activism. Like-

wise, there are three broad approaches to green investing:

thematic approach, screening, and engagement. Thematic

approach works on the lines of “pure play”which means

investing exclusively in sectors that are directly aiming at

impacting climate positively, such as renewable energy, clean

technology, energy efficient automobiles, water and waste-

water management, and so on. So it focuses only in sectors

directly tackling environmental issues. Screening approach

can be as basic as screening of sin stocks like avoiding

tobacco, alcohol manufacturing companies. Excluding sin

stocks is one of the criteria being applied in conjunction with

others since ages. The approach can be further classified as

“positive screening”and “negative screening.”Positive

screening means including those companies in the portfolio

that have performed strongly at environmental dimension in

comparison to their peers in respective sectors. Positive

screening is also referred to as the “best-in-class”approach.

Negative screening, also known as exclusionary ethical

investing,”is excluding those companies from portfolio

whose operations are directly harming the environment or

the ones whose offerings are environmentally harmful.

Both the strategies are used in conjunction. Third predomi-

nant approach is shareholder activism which can be carried

out through engagement, proxy voting and dialoguing. The

approach involves actively confronting management and

board to set environmental controls in place. Institutional

investors, who are bound to having long-term relationship

with companies, create a pressure to change their outlook

and practice in favor of environment through active

TRIPATHI AND JHAM 77