Impact of Green Rating on Returns: An Event Study

The increasing pressure by various stakeholders on the corporate sector to act in an environmentally responsible and sustainable way is reflected in the form of performance of share prices in the stock market. This paper deals with the impact of announcement of green ratings of the companies on the performance of their share prices in the stock market. The sample consists of companies from cement, iron and steel, automobile, chlor-alkali and paper and pulp sectors, rated by the Centre for Science and Environment, and the Indian companies included in the Newsweek 2012 top 500 global green-rated companies. The results indicate that with the announcement of the green ratings, the stock market returns are better than expected for the automobile sector. It gives the cumulative average abnormal return (CAAR) of 16% for the automobile industries and penalises the underperformers by giving negative CAAR of 23% for the chlor-alkali and 7.8% for the cement industries. Newsweek-ranked companies are given a CAAR of -1.9% for the 21-day event window. This study finds that better returns for the companies going green and poor returns for those showing non-environment friendly behaviour establishes a significant relationship between companies going green and their stock returns.