Environmental backsliders, repeat offenders and capital markets: Evidence from India

Regulatory rollbacks raise a critical question for emerging markets: do investors discipline firms that relapse on environmental performance? We combine the two public rounds of India's Green Rating Project (GRP) for 17 mills in the paper-and-pulp sector with a variance-robust event study. We uncover a double-digit market penalty for environmental backsliding (decline in green rating), proving that investors care about a firm's trajectory, not just its current score. Plants that improve or maintain ratings experience no significant abnormal return. Periodic, third-party performance evaluation and rating programs can leverage capital-market discipline to compensate for persistently weak regulation in emerging markets or for regulatory rollback as observed in the U.S., Brazil and Europe.