Do Green and Energy Indices Outperform BSESENSEX in India? Some evidence on investors’ commitment towards climate change

Abstract

This study aims at investigating the performance of Indian stock indices augmenting carbon emissions such as BSE Energy index and BSE Oil & Gas index vis a-vis BSESNSEX, the apex index representing Indian stock market, and also of those indices capturing the commitment of industries towards mitigating risks arising from pollution and climate change, such as BSE Greenex and BSE Carbonex, with reference to investors’ benchmark index viz., BSESENSEX, during the period January 2010 to December 2019. Besides using three risk adjusted return ratios, namely, the Sharpe ratio, Treynor ratio, and Jensen’s Alpha, on all the five indices, we have also applied GARCH-in-mean model to find if there is a risk premium involved either for causing emission or for mitigating the ill effects of emission. The results show that BSE Carbonex outperforms BSESENSEX and all the three other indices in terms of the three performance metrics used. Moreover, all green indices and BSESENSEX show significant presence of risk premium in terms of GARCH-in-mean model. Overall, therefore, the study finds that some of the green funds such as those representing BSE Carbonex outperform BSESENSEX compared to traditional funds in India.

Keywords

• energy indices
• Green indices
• GARCH in mean model
• Risk return relationship
• Low carbon economy

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