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Stock markets in India penalize environmental unfriendly behavior.

Today, thanks to television, that has indirectly enabled us to monitor our environment for the better. Living in world of Hollywood, Bollywood, CNN, BBC etc, it only takes a second for vital information and ideology to be disseminated across the nation and around the globe. As a consumer it has enabled us to choose for those products and services that are more environmental friendly, and as investor v arious research points to the fact that stock markets react to environmental news creating an incentives for pollution control even at times when direct regulation has failed.

In a study, the first of its kind for India, Shreekant Gupta & Bishwanath Goldar (March 2003), examined the impact of environmental ratings on stock prices. Their finding reveals that that the stock market in our country generally penalizes environmentally un-friendly behaviour. The study uses the environmental rating by Centre for Science and Environment, (CSE) Stock markets in India penalize environmental unfriendly behaviora Delhi based NGO. The rating evaluates environmental performance of various industries under its Green Rating Project (GRP). The project rates thirty one pulp and paper plants representing 23 firms across 13 states that were announced on July 18,1999, twenty nine automobile manufacturers that were released on October 29, 2001 and finally twenty five Chlor Alkali firms compromising about 90 percent of caustic-chlorine sector which were released on September 2002. The uniqueness of GRP is that it is the first time anywhere in the developing country that an NGO has undertaken to rate the environmental performance of Industries for the public and that these ratings are benchmarked against ‘theoretical best practices’, and not against existing environmental norms, standards or regulation. In fact in the rating process, full compliance with current environmental regulation merely fetches a score of 2 out of 10, global best practices 8, and Ideal best practice 10, clearly reflecting an incentive for better environmental performance. Beside the GRP, industries were also given ‘green leaves’, award ranging from no award to five leaves.

Except for the automobile industries, the paper and pulp and chlor alkali firms experienced negative abnormal returns following the announcement of the GRP ratings and green leaves award. Given the CSE long running campaign against the automobile industries, ‘the better than expected’ performance by the auto firms could be viewed as positive performance news from the market and hence a findings of positive abnormal return.

These findings clearly indicate that capital markets in both developed and developing countries can strengthen environmental regulatory efforts and create incentives for participation in voluntary environmental programmes.

By - Prasoon S Majumdar

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