Environment, Development and Sustainability

, Volume 17, Issue 6, pp 1329–1342 | Cite as

Risk-return and Volatility analysis of Sustainability Index in India

Article
First Online:
Received:
Accepted:
  • 475 Downloads

Abstract

Companies screened for their superior performance in environmental, social and governance (ESG) parameters comprise the sustainability index introduced at global as well as national stock exchanges. This study not only compares the performance of the sustainability index of India—the S&P ESG India Index with two broad market indexes, viz., the Nifty and the S&P CNX 500 using daily index data—but also analyses the inherent conditional volatility using generalised autoregressive conditional heteroscedasticity models. The results indicate that though the daily compounded returns to the ESG India Index are not statistically different from those of the Nifty or those of the CNX 500, annualised returns of the ESG India Index have been better than the returns of the other two indexes. Thus, focussing on environmental and social sustainability is a win–win situation for companies, investors and the society at large. There is significant volatility clustering in all the three indexes. The ESG India Index has been less volatile compared with the Nifty during the period. These results have corporate implications to focus on ESG parameters seriously in order to benefit from its sensitivity in the stock markets. It also reflects upon investor acceptance and potential for growth of socially responsible investments in India.

Keywords

Sustainability index (S&P ESG India Index) Socially responsible investing Capital asset pricing model Risk-return analysis Volatility GARCH models 

JEL Classification

G1 C580 
This is a preview of subscription content, log in to check access.

Notes

Acknowledgments

The author would like to thank Dr. P. Duraisamy, Professor, Dept. of Econometrics, University of Madras for his guidance while pursuing this research work.

Conflict of interest

The author declares ‘No conflict of interest’.

References

  1. Bauer, R., Koedijk, K., & Otten, R. (2005). International evidence on ethical mutual fund performance and investment style. Journal of Banking & Finance, 29, 1751–1767. doi: 10.1016/j.jbankfin.2004.06.035.CrossRefGoogle Scholar
  2. Bechchetti, L., Ciciretti, R. (2006). Corporate social responsibility and stock market performance, In CEIS Tor Vergata, Research paper series, 27, Working paper No. 79. http://papers.ssrn.com/abstract=897499. Accessed January 23, 2013.
  3. Benson, C.C., Gupta, N.J., Mateti, R.S. (2010). Does risk reduction mitigate the costs of going green? An empirical study of sustainable investing, Southern Journal of Business and Ethics, SSRN-id210948. Accessed April 10, 2013.Google Scholar
  4. Bera, A. K., & Higgins, M. L. (1993). ARCH models: properties estimation and testing. Journal of Economic Surveys, 7(4), 307–366.CrossRefGoogle Scholar
  5. Bollerslev, T. (1986). Generalised autoregressive conditional heteroscedasticity. Journal of Econometrics, 31, 307–327.CrossRefGoogle Scholar
  6. Campbell, J. Y., Lo, A. W., & Mackinlay, A. C. (1997). The econometrics of financial markets. Princeton, New Jersey: Princeton University Press.Google Scholar
  7. Carhart, M. (1997). On persistence in mutual fund performance. Journal of Finance, 52, 57–82.CrossRefGoogle Scholar
  8. Engle, R. F. (1982). Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom Inflation. Econometrica, 50(4), 987–1007.CrossRefGoogle Scholar
  9. Fama, E. F., & French, K. R. (1993). Common risk factors in the returns of stocks and bonds. Journal of Financial Economics, 33, 3–56.CrossRefGoogle Scholar
  10. Ghosh, A. (2013). Corporate sustainability and corporate financial performance: The Indian context, Indian Institute of Management, Calcutta, Working paper series, WPS No. 721.Google Scholar
  11. Glosten, L. R., Jagannathan, R., & Runkle, D. E. (1993). On the relation between the expected value and the volatility of the nominal excess return on stocks. The Journal of Finance, 48(5), 1779–1801.CrossRefGoogle Scholar
  12. Gujarati, D. N., & Sangeetha, (2007). Basic econometrics. New Delhi: Tata McGraw Hill.Google Scholar
  13. Gupta, D. (2011). Socially responsible investing in India: Myth or reality, Working paper, Oikos PRI Young Scholars Academy 2011: The future of responsible investment.Google Scholar
  14. Gupta, S., & Goldar, B. (2005). Do stock markets penalize environment-unfriendly behaviour? Ecological Economics, 52(1), 81–95.CrossRefGoogle Scholar
  15. Halkos, G., & Sepetis, A. (2007). Can capital markets respond to environmental policy of firms? Evidence from Greece, Ecological Economics, 63, 578–587. doi: 10.1016/j.ecolecon.2006.12.015.CrossRefGoogle Scholar
  16. Hamilton, S., Jo, H., & Statman, M. (1993). Doing well while doing good? The investment performance of socially responsible Mutual Funds. Financial Analysts Journal, 49, 62–66.CrossRefGoogle Scholar
  17. Hoti, S., McAleer, M., & Pauwels, L. L. (2005). Modelling environmental risk. Environmental Modelling and Software, 20, 1289–1298.CrossRefGoogle Scholar
  18. Jensen, M. C. (1968). The performance of mutual funds in the period 1945–1964. Journal of Finance, 23(2), 389–416.CrossRefGoogle Scholar
  19. Manescu, C. (2010). Stock returns in relation to environmental, social and governance performance: Mispricing or compensation for risk? Working papers in Economics No, 376, University of Gothenburg, School of Business, Economics and Law.Google Scholar
  20. Nelson, D. B. (1991). Conditional heteroskedasticity in asset returns: A new approach. Econometrica, 59, 347–370.CrossRefGoogle Scholar
  21. Ortas, E., Moneva, J.M., Salvador, M. (2010). Conditional volatility in sustainable and traditional stock exchange indexes: analysis of the Spanish market. GCG George Town University-Universia, 4(2), 104–129.Google Scholar
  22. Renneboog, L., Horst, J. T., & Zhang, C. (2008). The price of ethics and stakeholder governance: Evidence from socially responsible mutual funds. Journal of Corporate Finance, 14(3), 302–322.CrossRefGoogle Scholar
  23. Sauer, D. (1997). The impact of social-responsibility screens on investment performance: Evidence from the domini equity mutual fund. Review of Financial Economics, 6, 137–149.CrossRefGoogle Scholar
  24. Scholtens, B. (2005). Style and performance of Dutch Socially Responsible Investment Funds. The Journal of Investing, 2005, 63–72.CrossRefGoogle Scholar
  25. Schroder, M. (2007). Is there a difference? The performance characteristics of SRI Equity Indices. Journal of Business Finance and Accounting, 34, 331–348.CrossRefGoogle Scholar
  26. Sharpe, W. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance, 19, 425–442.Google Scholar
  27. Sharpe, W. (1966). Mutual fund performance. Journal of Business, 39(1), 119–138.CrossRefGoogle Scholar
  28. Srinivasan, S., & Singh, R. K. (2010). The persistence of green goodwill. Environment, Development and Sustainability, 12, 825–837. doi: 10.1007/s10668-009-9226-z.CrossRefGoogle Scholar
  29. Statman, M. (2000). Socially responsible mutual funds. Financial Analysts Journal, 56, 30–39.CrossRefGoogle Scholar
  30. Treynor, J. L. (1965). How to rate management of Investment Funds. Harvard Business Review, 43, 63–75.Google Scholar
  31. Vasal, V.K. (2009). Corporate social responsibility and shareholder returns—Evidence from the Indian capital market. Indian Journal of Industrial Relations, 44(2), ISSN:0019-5286, Accession number 210224372.Google Scholar

Copyright information

© Springer Science+Business Media Dordrecht 2014

Authors and Affiliations

  1. 1.Doctoral Research Fellow, Department of EconometricsUniversity of MadrasChennaiIndia

Personalised recommendations