Does the market reward exceptional environmental performance? : an event study of the WilderHill New Energy Global Innovation Index

2020

This thesis studies if the market rewards exceptional environmental performance. To

do this, we examine whether inclusion in the WilderHill New Energy Global Innovation

Index (NEX) yields positive abnormal returns and abnormal trading volume around the

announcement and the rebalance date of the new index constituents by applying the event

study methodology. The sample consists of quarterly events starting from the index’s

inception in 2006 until today. Besides studying the effect on an aggregate level, the data

is subcategorized into periods and regions to capture changes in investors’ perceptions

and regional differences, respectively.

This study does not find significant positive abnormal returns around the announcement

date of the new index members or the effective rebalance date of the index. However, we

observe regional differences, with the US showing significant positive abnormal returns

for the period 2006-2013, while Asia and the Pacific are yielding significant negative

returns for the period 2006-2013 and 2013-2019. Furthermore, this study finds a significant

negative effect in the event window prior to the announcement for the period 2013-2019.

This is in contrast to our initial hypothesis, which states that inclusion in the NEX Index

should yield significant positive abnormal returns. On the other hand, we find significant

positive abnormal trading volume around the rebalance date. This is in line with our

hypothesis, which states that inclusion in the NEX index should have a significant positive

effect on abnormal trading volume around the rebalance date.

Our thesis does not give any clear evidence on the expected positive link between

environmental acclaim and financial performance. The results suggest that companies

receive more attention around inclusion, but the price reactions are ambiguous.

Asian investors seems to be penalizing inclusion, which corroborates the findings and

sustainability redundancy hypothesis of Cheung and Roca (2013). This could also explain

the overall price reactions, as negative reactions from investors with a sustainability

redundancy view might cancel out the positive effects from other investor segments.

Keywords – Sustainable Finance, ESG, WilderHill New Energy Global Innovation Index