Price Behaviour of Indian Sustainable Investment – A Comparative Study

 

C. Hariharan¹, Dr. M. Babu²*

¹Research Scholar, Bharathidasan School of Management, Bharathidasan University, Thiruchirappalli,

Tamil Nadu, India -620024.

²Assistant Professor, Bharathidasan School of Management, Bharathidasan University, Thiruchirappalli,

Tamil Nadu, India -620024.

 

ABSTRACT:

In the past few decades, many investors, at national and international level, focused on sustainable investments like SRI Mutual fund schemes, ESG Indices, etc. Hence the present study aims to investigate the price behavior of Indian Sustainable investment indices and their parent index. The study used Nifty 100 enhanced ESG and Nifty 100 ESG index as sustainable investment indices and Nifty 100 as the parent index. Daily prices of sample indices were collected for the period of April 2011 to March 2017 and the results of Descriptive statistics, Augmented Dickey-Fuller test and GARCH (1, 1) Model indicated that daily prices of sustainable investment indices’ returns were better than the parent index, during the study period. The results of GARCH (1, 1) model showed that volatility of Indian sustainable investment indices was lower than the parent indices, during the study period. Hence the investors can diversify the risk from different portfolios, through other types of sustainable financial assets.

 

KEYWORDS: GARCH (1, 1) Model, Nifty index, Price Behaviour and Sustainable Investment.

 

 

INTRODUCTION:

Sustainable and Responsible Investment (SRI) strategies have been gaining currency rise given the increasing awareness about environmental stability, socio-economic development and adherence to ethical standards. Recently, the perceived lack of governance during global financial crisis, increasing threat from global warming, activism on social issues etc. have brought about a consensus towards importance of holistic growth and responsible investment. One such strategy, that has gradually gained popularity among investors, is Environmental, Social and Governance (ESG) based investing.

 

 

The underlying principle, behind ESG based investing, lies in identifying and quantifying the intangible value possessed by socially responsible, environmentally friendly firms, with robust governance policies in place. These firms are believed to exhibit better risk management measures on ESG parameters, which, in turn, create value for investors with long-lasting sustainable business models.

 

Environmental, Social and Governance (ESG) theme is an effective portfolio selection strategy under the broader theme of sustainable and responsible investment (SRI). Fund managers and investors can focus upon firms, with better ESG performance, to generate higher returns with lower company specific risk. India Index Services and Products Ltd (IISL), an NSE group company, has launched 2 ESG indices: NIFTY100 Enhanced ESG Index and NIFTY100 ESG Index. These ESG indices are expected to appeal to the investment community, looking to align their investment with the ESG theme.

 

ESG based investment strategy has gained popularity, across global investors, with emphasis on investment in companies which have sustainable and responsible business models. The underlying drive, behind ESG theme based investing, lies in generating returns from socially responsible, environment friendly and ethical firms, by reducing the company specific risk associated with ESG controversies. The construct of NIFTY100 ESG indices resulted in portfolio with similar sector exposure vis-à-vis NIFTY 100 (parent index), but with stock level ESG tilt. This resulted in portfolio, with higher weightage towards companies, with better ESG performance. The NIFTY100 ESG indices had outperformed their parent NIFTY 100 over long term investment horizons. These indices would cater to the benchmarking needs of investors, seeking to track the performance of portfolio of companies, that have better ESG compliance. The indices are also expected to serve as reference indices, which can be tracked by passive funds in the form of Exchange Traded Funds (ETFs), index funds and structured products.

 

REVIEW OF LITERATURE:

There are several national and international researchers who studied the sustainable investment and the present study reviews their findings as follow.

 

On the basis of socially responsible investment, Janusz Brzeszczynski (2016) tested and compared the performance of international energy and resource companies’ stocks, with benchmark indices, for a period of ten years. The study found that socially responsible stock investments’ annual average performance was higher than the benchmark indices. Eduardo Ortas (2010) investigated the volatility level of socially responsible investment stock exchange indices in the Spanish market. Using GARCH models, the study found that compared to other indices, the SRI equity indices of Spanish markets recorded low volatility. Meir Statman (2000) compared the performance of socially responsible mutual funds (Domini social fund) and stock index (S&P 500) for the period of 1990-98. He found that socially responsible mutual fund’s performance was better than stock index and other conventional mutual funds. Priyanka Garg (2017) developed the sustainability index with the Indian companies, using socially responsible investment methodology, for constructing the sustainable investment and this methodology was checked with the BSE 500 companies. it was proved that socially responsible investment can be taken as a standard framework, along with the methodology. Henry Mynhardt (2017) analysed the efficiency of traditional stock market indices and socially responsible stock market indices. The results of the study showed that efficiency of socially responsible investment indices was low, especially the efficiency of Dow Jones sustainability index was very low compared to traditional index. Sudha. S (2014) tested the risk and return of Indian sustainable index and broad market indices. The study selected the S&P ESG India Index as a sustainable index and Nifty, S&P CNX 500 as a broad market index. The results of CAPM model and GARCH models, showed that S&P ESG India index’s volatility was lower than the Nifty and S&P CNX 500. At the same time, the return of sustainable index was better than the other two broad market indices. Neutrality in the relationship between the indices is shown in the work of Hoti et al. (2008), who noted the high level of correlation between Conventional indices and socially responsible indices. Drezewski et al,. (2017) observed that the difference between the TI and SRI exists due to the structural composition of indices. Tomo, A., and Landi, G. (2016) highlighted the necessity for a stronger ethical foundation to contribute more to sustainability criteria should be taken into investment decision-making processes in order to transform the formal financial orientation to short term benefit. Fatemi and Fooladi (2013) clearly stated that investors and decision makers have to consider the responsible investment strategies and to be aware of all costs and benefits of economic, social and environmental, before investment in a project. Humprey et al. (2012) stated that incorporate ESG into investment is part of responsible investment. Thus, from the investors’ perspective, ESG analysis can be considered an additional tool to utilize, in addition to traditional financial analysis, the asset valuation and risk assessment to determine a company’s strengths and weaknesses.

 

Majority of earlier researchers analysed sustainable investment indices, on the basis of efficiency. Some studies only analysed the price volatility of the sustainable investment Indices. But this study aims to analyze the price volatility behaviour in Sustainable investment indices with their parent Index, during the study period, 1^st April 2011 to 31^st March 2018, with the help of GARCH model.

 

OBJECTIVE OF THE STUDY:

The main objective of the present study was to investigate the price behavior of Indian Sustainable investment indices and their parent index. For this purpose, the study formulated the following additional objectives.

·      To test normality and unit root of daily returns of Sustainable Investment (ESG) indices and their parent Nifty (100), during the study period of April 2011 to March 2018.

·      To analyse the price volatility behaviour of daily returns of Sustainable Investment (ESG) indices and their parent Nifty (100), during the study period of April 2011 to March 2018.

 

HYPOTHESIS OF THE STUDY:

NH01:   Daily returns of Sustainable Investment (ESG) indices and their parent Nifty (100) index are not normally distributed during the study period.

NH02:   Daily returns of Sustainable Investment (ESG) indices and their parent Nifty (100) index are not stationary during the study period.

NH03:   Daily returns of Sustainable Investment (ESG) indices and their parent Nifty (100) index are not volatile during the study period.

 

METHODOLOGY OF THE STUDY:

Sample selection:

In the recent years, the global investors are focused on socially responsible investments. Hence the present study proposed to analyse the price behaviour of Indian sustainable investment indices and their parent index. For that purpose, the study used Nifty 100 ESG and Nifty 100 Enhanced ESG index as a sustainable investment index and Nifty 100 was selected as parent indices of the sample sustainable investment indices.

 

Sources of Data:

The research was mainly based on secondary data and the daily prices of sample sustainable investment Indices and their parent index were collected from the official website of National Stock Exchange Ltd of India. The other data were collected from various websites, journals, magazine etc.

 

 

 

 

Period of the study:

The National stock exchange ltd of India was introduced the ESG indices on 1^st April 2017 but its base date was 1^st April 2011 and hence the period of 1^st April 2011 to 31^st March 2018 was selected as the sample period of the study.

 

Statistical tools used in the study:

The present paper used the following statistical tools of testing the hypotheses of the study.

 

Descriptive Statistics:

It was used for analyzing the nature and normality of the daily returns of Sustainable Investment (ESG) indices and their parent Nifty (100) index.

 

Augmented Dickey-Fuller test:

This test helped to analyse the unit root / sationarity of the daily returns of Sustainable Investment (ESG) indices and their parent Nifty (100) index.

 

GARCH (1, 1) Model:

This model was used for testing the price volatility behaviour of daily price of Sustainable Investment (ESG) indices and their parent Nifty (100) index.

 

RESULTS AND DISCUSSION:

The Table – 1reveals that the NIFTY100 ESG indices recorded returns comparable to their parent NIFTY 100 index since 2011, though both NIFTY100 Enhanced ESG and NIFTY100 ESG indices had marginally outperformed NIFTY 100 Index in 4 out of the 6 full calendar years since April, 2011. The performance was comparatively high during 2012 and 2013 calendar years.

 

Table – 1: Performance of Sustainable Investment indices and their Parent Index.

Source: NSE Official Website

 

The Table 2displays the results of descriptive statistics, for sample Indian sustainable index namely Nifty 100 Enhanced ESG, Nifty 100 index and its parent index Nifty 100. The mean value of both the sustainable index values were 0.000429 and 0.000417and this indicated that Nifty 100 Enhanced ESG and Nifty 100 ESG yielded positive return during the study period and both the indices recorded returns higher than their parent index Nifty 100 (0.000401). Compared to the Nifty 100, values of the standard deviation for sample sustainable indices was higher. It is to be noted that the risk of sustainable indices were high than their parent index. Skewness values, for sample indices, revealed that daily return of all the three sample indices were negatively skewed and from the kurtosis values, leptokurtic was evident in daily returns of all the three sample indices. The Jarque Bera values indicated that daily returns of sample indices were normally distributed during the study period.

 

 

Table – 2: Results of Descriptive Statistics for sample Indian sustainable index

Source: Data collected from official website of NSE and Computed in E - Views

 

 

 

Table – 3: Results of Augmented Dickey-Fuller test for sample Indian sustainable index

Source: Data collected from official website of NSE and Computed in E -Views

 

 

 

Hence the study rejected the null hypothesisNH01, “Daily returns of Sustainable Investment (ESG) indices and their parent Nifty (100) index are not normally distributed during the study period”.

 

The results of Augmented Dickey-Fuller test, for sample indices, are displayed in Table 3. Values of the Augmented Dickey-Fuller test statistic for daily returns of sustainable indices and their parent index were -38.09483, -38.03759 and -37.85828 and these values were less than the test critical values at 1%, 5% and 10% level and this indicated that the three sample indices experienced stationarity during the study period. These results also proved that the probability values of all the three sample indices were less than the significant value of 0.05. Hence reject the null hypothesis NH02:“Daily returns of Sustainable Investment (ESG) indices and their parent Nifty (100) index are not stationary during the study period”.

 

The results of GARCH (1, 1) Model, for daily returns of sustainable (ESG) indices and their parent index (Nifty 100),are presented in the Table - 4. The sum values of GARCH 1 and ARCH 1 for daily returns of Nifty 100 Enhanced ESG, Nifty 100 ESG and Nifty 100, were 0.991123, 0.991044 and 0.98813 and asper the researcher Chou, R.Y, 1988, these values were close to one and it indicated volatility of three sample indices to be constant during the study period. As per the Dowd, K., 2003 rule, GARCH 1 values, for all the sample indices, were higher than the ARCH 1 values and it also proved volatility to be constant in the study period and it took long time to change. The probability values also proved that there was volatility in all the three sample indices during the study period because the values were less than the significant value of 0.05. Hence reject the null hypothesis NH₀₃,“Daily returns of Sustainable (ESG) indices and their parent Nifty (100) index are not volatile during the study period”.

 

 

Table – 4: Results of Augmented Dickey-Fuller test for sample Indian sustainable index

Source: Data collected from official website of NSE and Computed in Eviews

 

 

 

CONCLUSION AND RECOMMENDATIONS:

Sustainable investment is one of the emerging investments in the world and many national and international investors are interested in the sustainable investment. Hence the study investigated the price behaviour of Nifty 100 ESG Index, Nifty 100 Enhanced ESG Index and Nifty 100 Index for the period of April 2011 to March 2018. Descriptive statistics, Augmented Dickey-Fuller test and GARCH (1, 1) Model were used and the study found that sustainable investment indices’ return were higher than the parent index Nifty 100but at the same time, volatility of the sustainable investment indices was lower than the Nifty 100. This result concurs with the existing research of Vassal (2009). Hence the study advises investors to diversify the formal investment into sustainable investment, because the volatility of sustainable investment indices’ was low while the return was greater than the formal index.

 

REFERENCES:

1.     Chou, R. Y. (1988). Volatility persistence and stock valuations: Some empirical evidence using GARCH. Journal of Applied Econometrics, 3(4), 279-294.

2.     Drezewski, R., Dziuban, G., and Pająk, K. (2018). The Bio-Inspired Optimization of Trading Strategies and Its Impact on the Efficient Market Hypothesis and Sustainable Development Strategies. Sustainability, 10(5), 1460.

3.     Dowd, K. (2003). An introduction to market risk measurement. John Wiley and Sons.

4.     Fatemi, A. M., and Fooladi, I. J. (2013). Sustainable finance: A new paradigm. Global Finance Journal, 24(2), 101-113.

5.     Garg, P. (2017). Development of sustainability reporting index (SRI) with special reference to companies in India. Decision, 44(4), 259-273.

6.     Hoti, S., McAleer, M., and Pauwels, L. L. (2008). Multivariate volatility in environmental finance. Mathematics and Computers in Simulation, 78(2-3), 189-199.

7.     Humphrey, J. E., Lee, D. D., and Shen, Y. (2012). Does it cost to be sustainable?. Journal of Corporate Finance, 18(3), 626-639.

8.     Lucey, B. M., Vigne, S. A., Ballester, L., Barbopoulos, L., Brzeszczynski, J., Carchano, O.  and Goodell, J. W. (2018). Future directions in international financial integration research-A crowd sourced perspective. International Review of Financial Analysis, 55, 35-49.

9.     Mynhardt, R., Makarenko, I., and Plastun, O. (2017). Market efficiency of traditional stock market indices and social responsible indices: the role of sustainability reporting.

10.   Ortas, E., Moneva, J. M., Burritt, R., and Tingey-Holyoak, J. (2014). Does sustainability investment provide adaptive resilience to ethical investors? Evidence from Spain. Journal of Business Ethics, 124(2), 297-309.

11.   Statman, M. (2000). Socially responsible mutual funds. Financial Analysts Journal, 30-39.

12.   Sudha, S. (2015). Risk-return and Volatility analysis of Sustainability Index in India. Environment, development and sustainability, 17(6), 1329-1342.

13.   Tomo, A., and Landi, G. (2016). Behavioral Issues for Sustainable Investment Decision-Making: A Literature Review. International Journal of Business and Management, 12(1), 1.

 

 

 

 

 

Received on 03.09.2018       Modified on 20.10.2018

Accepted on 15.11.2018      ©A&V Publications All right reserved