Fair weather trends: The environment as an ‘optional extra’?

• Environment themed-index Verdurous India Index outperforms the benchmark during growth phases.
• The custom-built Index nullifies some of the negative sentiment during downturns.
• Roughly half of the volatility in firm valuation is driven by system-wide effects.
• Firms should communicate environmental credentials better.

The Verdurous India Index   consistently outperforms the market proxy when investors appear optimistic, and underperforms during each downturn: 46.50% (benchmark 17.4%), 22.50 (13.1), 15.53 (15.3), 32.65 (28.3) during four distinct growth phases; and −14.66%−14.66% (benchmark 16.74%), 18.38 (21.97), 10.30 (9.80) during three distinct downturns. The observed cyclicality in returns from the environment-themed index may be construed as a “correction” of sentiment–in either direction–rather than a substantive alteration in the fundamental value of the underlying portfolio. Tobin’s ‘q’ and marginal ‘q’ analyses of the index relative to the broader markets reveal that investor perceptions relating to ‘efficiency of asset use’ drag the broader markets down, and along with it the individual firms constituting the index. However, while 44% of the variability in the marginal ‘q’ is explained by movements in market capitalization of the Verdurous-index-constituents, 56% of the variability was a function of firm-specific management practices. Yet, the robustness of the index portfolio helps negate this impact to a limited extent. The loss in valuation concurrent with exogenous shocks, and a diminished valuation of the broader markets, would imply that the greener among the firms had not adequately or succinctly signaled their firm and sustained commitment to the natural environment to the investor community.

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