The effect of environmental performance on stock returns: a study of South African stock markets

Abstract

Changes in climate change have brought about new strategies in investing. This is further reiterated with the creation of sustainability indices which are able to capture the performance of stocks with a strong sustainable performance and are able to advance on the environmental problem. The question to ask is does the market value companies that have better environmental reputations than those that do not? This paper researches on the impact of firms’ environmental performance on their stock returns, with a focus on the South African market. Environmental performance in this case is captured by an event study following the FTSE and JSE partnership announcement and followed subsequently with the launch of the FTSE/JSE Responsible Index. OLS and M-estimation are used to analyse the coefficients. With the improved results of the M-estimator of coefficients, the findings are not sufficient to be representative of the JSE All Share Index. This is because only three of the ten sample of stocks listed on the responsibility index show significant changes in risk and only one stock in the responsibility index made an abnormal return with the partnership announcements. Of those not listed on the responsible index, only two companies reported negative abnormal returns at the partnership announcement, with another one company being punished at the launch of the responsible index after reporting negative abnormal returns. Therefore, it is the conclusion that environmental performance does not make a great impact for the stocks listed on the JSE All Share Index. Further areas of research include a focus on other developing countries with sustainable indices, changes in the model to allow for MM-estimation for regression analysis and the consideration of the impact of environmental performance on economic performance as well.