Author(s) :

Madhu Bala.

Volume/Issue :

Abstract :

The focus on green or sustainable investment has become common, and is duly recognized by corporate sector. However, does emphasis on green practices really push market value of enterprise? The existing research over more than four decades has explored mixed, inconsistent, inconclusive or contradictory results. The purpose of this study is to unravel the impact of green practices on market valuation of firms in Indian perspective by using secondary data. In this study, a sample of 195 companies has been analyzed using environmental score of Credit Rating and Information Services India Limited, and other financial data sought from ProwessIQ database of the year 2020-21. The Multiple Regression analysis has discovered a positive and statistically significant relationship between the green initiatives and market valuation of the companies. The results are important for all stakeholders, specially, to the providers of funds; who aspire to widen the coverage, spending, and reporting of green practices among corporates to maximize wealth and welfare for all.

No. of Downloads :

32

KEYWORDS:

Green Score, Market Valuation, Regression, Tobin Q

INTRODUCTION & OBJECTIVES:

Environmental or green responsibility indicates towards the realization on the part of corporates to be accountable for the impact of their industrial activities on environment and making the disclosure of the same in financial statements; which have the potential of influencing their economic performance. Good environmental practices may be defined as the sum of activities which are directed to reduce the negative environmental impact initiated by actions, processes, policies, programs, or methods undertaken in the organizations to conduct business, such as, emphasizing and implementing new options to reduce carbon emissions, pollution, waste like toxic chemical releases, and use of natural resources; incorporating new green building technologies; commitment to continuous improvement in supply chain; practicing the most efficient balance of time, effort, technique, and transport channel to get products to consumers; asking and encouraging business associates to follow environmental standards; and adhere to all applicable environmental laws and regulations. The set of these concerns should be incorporated and reflected in the strategic planning; and may be pushed through the engine of long-term planning with more inclusive bouquet of green responsibilities. On the one hand, a remarkable shift in the perception of investors is noticed by assigning preference and investment in sustainable funds; and on the other hand, the firms are also seen as changing the way of carrying out commercial activities due to continuous environmental degradation in the form of depleting ozone layer, increased global warming, and changing climate. They have started taking note of harmful effects of their commercial operations on the environment. But, to achieve this objective, efforts made by companies differ widely. The amount spent on this aspect seems to be a function of management’s vision and availability of financial resources with enterprise. According to Singal (2014) the hospitality firms invest relatively more in green activities which improve financial health of the firms; and the sound financial performance, in turn, encourages them to increased investments on sustainability front, building a virtuous cycle. At the same time, different mechanism may be followed by firms to integrate environmental dimensions into organization’s policy framework. Petrini & Pozzebon (2009) have pointed out towards the importance of business intelligence systems in organizations, which play an important role in implementing and monitoring of sustainable practices; more specifically, by integrating relevant green information into reporting activities for the users. The green initiatives are increasingly cheered up by global and domestic investors, customers, and regulatory bodies; and are supported by different theories, such as, the stakeholder theory, the agency theory, and the theory of environmental concerns. Stakeholder theory emphasizes that management has accountability towards all stakeholders because they must receive fair and just treatment. The green practices have the capability to fortify this bond between the two. Further, the agency theory is based on the relationship between principal or shareholders and agent or management. The insiders or management is privy to all vital information of business, but the outsiders are generally, not. The environmental disclosures act as an instrument in minimizing information asymmetry. It further improves decision-making and perception of investors, which enhances corporate valuations. The theory of environmental concerns centers on the protection of natural environment, as it has a utility or value to the mankind. The organizations are supposed to preserve the same while carrying out commercial operations rather than modifying or destroying it. It has suggested that environmental-friendly engagements have potential to maximize the benefits of stakeholders, and market valuation of firm. Therefore, businesses need to be sensitive to environmental concerns and embrace it voluntarily and/or mandatorily. These theories have suggested that corporates should embed green dimensions in core management policies and goals to enrich value of enterprise; and make adequate and timely disclosure of the same. The commitment of enterprise to its green obligations is reflected in the public disclosures made through financial or sustainability reports. However, the quantum and amount of environmental information disclosed differ among companies. Sustainability practices followed by public Oil and Gas companies were examined by Orazalin & Mahmood (2018), and found that companies having share of foreign ownership disclose more information on underlying issue than their counterparts which are owned by local investors. Furthermore, Deswanto & Siregar (2018) found that such disclosures are independent of financial performance of the firm. The significance of green actions is being reflected by the increasing number of sustainable funds in India, and the sizable amount garnered by them. Realizing the importance of environmental concerns, the Securities and Exchange Board of India has made mandatory for top 1000 listed companies by market capitalization, to comply with Business Responsibility and Sustainability Reporting (BRSR) framework, as part of annual reports since 2022-23. For other companies, it is voluntary, but desirable. It is bound to benefit not only investors who prefer to park their funds in sustainable securities; but also firms who aspire to reap advantages of improved market perception. The growing awareness among stakeholders about green engagements is cautioning that companies which continue to unaware or ignore environmental concerns; may face challenging operative environment, and find difficulties in raising required funds. To tackle key challenges on environmental front, the Indian Government has taken various steps by providing incentives and subsidies through budgetary allocations, such as, encouragement for electrical vehicles and renewable energy sources like solar energy, awareness and maintenance of national air quality index, rules for management of industrial waste, standards for pollution emission, and discontinuation of 15-year-old vehicles to reduce air pollution. Baah et al. (2021) highlighted that regulations have pressurized positively and significantly to adopt green practices which resulted in positive influence on firm’s reputation and financial indicators in manufacturing small and medium enterprises. Furthermore, Feldman et al. (1997) emphasized that the entities which go beyond mandatory adherence of green regulatory framework, enjoy higher stock prices and market valuation than the organizations that are endangered by actual or impending green regulations. It has also been observed that companies that invest in innovative pollution prevention technology are able to reap the benefits of higher market valuation than their counterparts that are entangled in the environmental controversies like chemical leaks and oil spills, which have to tolerate decline in valuation. Therefore, it may be argued that concept of green initiatives has assumed a significant importance and firms are attaining competitive edge by going greener and greener day by day.

DOI:

10.58426/cgi.v4.i1.2022.13-29