Does the stock market react to the sustainability index reconstitutions? Evidence from the S&P BSE 100 ESG index

Purpose Amid the growing investors’ interest in environment, social and governance (ESG) investing, the present study aims to examine the investors’ reactions to the reconstitutions of the prominent Indian sustainability index. Design/methodology/approach Incorporating both the announcement day (AD) and the effective change day (CD), the market model of event study methodology has been employed to measure the investors’ reactions in terms of abnormal stock returns in both the short and long term. Inclusions in and exclusions from the S&P BSE 100 ESG index are used as an indicator of sustainability. Findings Surprisingly, our empirical analysis suggests that stock markets do not reward the inclusion of a company in the sustainability index. However, unexpectedly, exclusions are accompanied by significantly positive cumulative average abnormal returns, observed during both the temporary price impact window and the total permanent price effect window. These atypical findings could be linked to the particular clientele composition of included and excluded companies. Practical implications The findings of this study carry significant implications for corporate decision-makers, investors and policymakers involved in sustainability and ESG practices within the Indian market. By shedding light on the market’s response to sustainability index reconstitutions, this research can aid in better managing associated opportunities and risks. Originality/value While previous research has predominantly focused on American and European markets, our study extends the analysis to understand how Indian investors respond to news of inclusions and exclusions from the BSE 100 ESG index. By offering insights into the price effects associated with the revisions in the S&P BSE 100 ESG index list, the study contributes to the advancement of literature.