Verdurous Index

The index-genesis

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In most countries, voluntary disclosure of environmental performance is frequently construed as being selective or incomplete or both. Where enforcement is stringent, fines imposed for environmental violation are reflected in lower stock prices for a relatively short duration. In all, investor concern differs across industry sectors and the correlation of environmental performance with firm valuation is weak and short-lived. The construction of a ‘broad-based’ green index would highlight and reward superior performance relative to the rest of the market, while sustaining pressure on statutory bodies to ensure effective enforcement.

Over the years, Verdurous has developed a holistic stock-market index, intended to assess the environmental bearing of business. The Verdurous India Index is intended to focus attention on and hence reward the eco-sensitiveness of businesses, and to help channel resources into the superior performers.

Index construction methodology

The Verdurous 25 is a modified market capitalization weighted index, and looks beyond the renewable energy, energy efficiency and recycling space, and incorporates firms from the mainstream ‘old economy’ manufacturing sector, which operate in the region of a theoretical ideal, and demonstrate environmental performance that is far superior to that of their respective industry peers. The environmental performance of the latter group of companies is measured by appropriately qualified independent experts.

The Verdurous Index comprises 30stocks that are hand-picked based on their environmental impact, out of all the stocks listed on the National Stock Exchange of India Ltd. (NSE).

Eligibility Factors

The index stocks fall into two broad categories:
  • i. Eco-Efficiency of Process
  • ii. Eco-Efficiency of Product
  • Companies that are traditionally recognized as green businesses, viz., wind energy generation, organic cotton product, waste water treatment etc., have been hand-picked by a bottom-up scrutiny of individual firms listed on the NSE. Companies included under the latter group of index-eligible firms have had their environmental footprint independently audited and reported by appropriately qualified (and reputed) agencies.

    Base Date

    The base date for the index is set at 5th June, 2009, the immediate past World Environment Day.

    Market Proxy

    The S&P CNX 500 is employed as the proxy for the market, especially for computing the asset beta.

    Index Computation

    Tracking and maintaining the Verdurous 25 index involves updating information relating to stock-splits, bonus share issues, changes in revenue mix, amalgamation etc. In order to keep the index complete and accurate as a measure of corporate environmental performance and market valuation of cleaner firms, adjustments are made on the ex-date of the corporate action. The market value of the firm is updated to provide for the revised number of shares outstanding.

    The base number for the market value of the index portfolio is 1000. Daily returns are available from 1st January 2010.

    Market Value of the Firm

    The Verdurous India Index takes the value of the entire firm[4] into account, as the index is intended to analyze the correlation between superior environmental performance and firm valuation. Future direct costs of installing pollution control equipment and/or cash outflows from penalties and fines should, in theory, be reflected in lower firm valuations at the present. However, in practise, this is not always the case. The index is intended to highlight this inconsistency and to sensitize the investors towards the cost of environmental externalities and to simultaneously enhance the rigor of enforcement by the authorities concerned.

    Frequency of computation

    The Verdurous India Index is calculated on all days the National Stock Exchange (NSE India) is open for business.
    • It is the only “green” index involving mainstream manufacturing companies.
    • Index constituents are hand-picked based on environmental performance (product or process related criteria).
    • It is a genuine index of market performance owing to its robust construction.
    • Benchmarking against broader index provides immediate insights into emphasis placed on environmental credentials by the investor community.
    • Index valuation is comparable across time.
    • Index performance is tracked over 10 years –approximating four business cycles.

    Verdurous Index performance