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

Date01 July 2020
AuthorVanita Tripathi,Juhi Jham
Published date01 July 2020
Corporate environmental performance and stock market
performance: Indian evidence on disaggregated measure
of sustainability
Vanita Tripathi
| Juhi Jham
Department of Commerce, Delhi School
of Economics, University of Delhi, New
Delhi, India
Shaheed Rajguru College of Applied
Sciences for Women, University of Delhi,
New Delhi, India
Vanita Tripathi, Department of
Commerce, Delhi School of Economics,
University of Delhi, B-7/74-75 Sector
11 Rohini, New Delhi, India.
Juhi Jham, Shaheed Rajguru College of
Applied Sciences for Women, University
of Delhi, B-7/74-75 Sector 11 Rohini, New
Delhi, India.
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.
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
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;
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 winwin 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 playwhich 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 screeningand 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-classapproach.
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

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