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

Abstract

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