Do Energy and Sustainable Indices Exhibit Signs of Decoupling from Broader Financial Market Index? The Indian Experience

Abstract: The study investigates the cointegration relationship between the sustainable and energy indices, and a broader market index of the National Stock Exchange of India. The data set includes daily closing prices of three indices namely Nifty 500, Nifty Energy and Nifty 100 ESG Indices over ten financial years, viz., April 1, 2014, to March 31, 2024. To delve into the co-integration dynamics, we employed three co-integration techniques: Engle-Granger, Phillips-Ouliaris and ARDL (with breakpoint). Further, we carried out Vector Autoregressive (VAR) dynamics to comprehend the interlinkages among the variables. The results found no evidence of long-run co-integration amongst the three indices; however, short-run causality was visible. The single breakpoint analysis using Perron's Innovative Outlier method revealed that all the break dates were post-COVID-19 pandemic, thereby reflecting that, unlike financial markets in developed economies, the pandemic was not the most important trigger of the Indian indices during the study period. Then the impulses to 1 SD shock under VAR were seen dying out in 7-8 days for all three variables. Further, diagnostics including serial correlation and model stability tests were found to be satisfactory with all variables being I(1) stationary . The study broadly concluded that in the absence of co-integration and no long-run relation, a clear signal of decoupling amongst the indices was visible and could identify two reasons for the same; first, the trigger factors impacting broader market conventional index, and sustainable and energy indices differ considerably and second, there was evidence of maturity of the investors in Indian markets revealing their willingness to attach higher valuations to companies embracing ESG and sustainability in their operations. Keywords: Sustainable Indices, Decoupling, Breakpoint ARDL, Perron’s Innovative Outlier, Impulse Response JEL Classification Number: G01, G11, Q56