ESG Investment in the Global Economy

ESG integrates the three factors of environment, social, and governance. Unlike traditional investment, ESG investment should reflect the company’s efforts on ESG issues, which comprise non-financial information, in their investment decisions. As many people have come to believe that a company’s ESG efforts represent its long-term growth, ESG investment has grown significantly in terms of financial returns. However, the history of ESG investment is not long. Therefore, it is doubtful whether each stakeholder’s information is efficiently reflected in the stock prices of the company, whose stakeholders are multiplexed and diversified stakeholders due to its hugeness, globality, and complexity. In other words, two questions remain regarding whether the total utility of stakeholders may not have been maximized and whether there is room for improving investment performance from the perspective of ESG issues. However, in the distant future, ESG information, which affects corporate value, will be properly reflected in the stock price. As a result, ESG investment might become defined as a real investment, and companies’ ESG efforts might become more efficient. The above motivates us to empirically analyze ESG investment, and we propose several directions.

This study employs the asymmetric dynamic conditional correlation (A-DCC) model developed by Cappiello et al. (2006) to empirically evaluate the conditional correlations between the MSCI World ESG Leaders Index (Environmental, Social, and Governance: ESG) and WilderHill New Energy Global Innovation Index (NEX: renewable energy stock), the S&P Green Bond Index Total Return (Green Bond index), and the Dow Jones Sustainability World Composite Index (Sustainability Index). The main findings can be summarized as follows: First, the pair of ESG Index and Sustainability Index exhibits a relatively stable trend with high levels of correlations. Second, the DCC for the pairs of ESG Index and Green Bond decreased significantly around 2014, which indicates that the decrease in crude oil prices weakened the correlation between ESG Index and Green Bond. Moreover, around 2020, the dynamic conditional correlation between ESG Index and the other three indices fluctuates significantly, which indicates that the impact of the 2020 COVID-19 pandemic is profound. Third, by employing the AR model to estimate the dynamic conditional correlation with dummy variables, we further demonstrate the influences from the crises to the DCC between variables. Environment, Social, and Governance (ESG) is a set of principles that socially responsible investors use to screen prospective investments for business operations. Environmental standards understand how a corporation works as a steward of nature. Social criteria analyze how a corporation handles relationships with workers, vendors, clients, and the societies in which it works. In recent years, ESG has become an increasingly common way for investors to determine the companies they may like to invest in. Additionally, several mutual funds, investment companies, and robo-advisors are now selling products that use the ESG criterion. This can also help investors avoid businesses that, because of their environmental or other policies, may pose a higher financial risk. In fact, the indices of corporate social responsibility (CSR) and socially responsible investment (SRI) are similar to ESG. CSR is a form of self-regulating international private businesses aimed at contributing to the social objectives of a philanthropic, activist, or charitable nature by participating in or encouraging voluntary or ethically focused activities.

As a sustainable and responsible investment (SRI), this research aims to measure the tail dependencies between investment in companies that have the highest environmental, social, and governance (ESG) rated performance and renewable energy companies based on the copula approach, which is crucial to monitoring systemic and extreme risks between two assets. Meanwhile, we evaluate whether renewable energy stock investors can effectively increase their portfolio performance by constructing a portfolio with the best ESG companies. The results reveal that tail dependence between ESG stocks and renewable energy stocks had been volatile during most periods. However, the strengthening trend could also be found when some extreme events occurred. On the other hand, we found that ESG stocks can effectively benefit renewable energy stock portfolios by improving risk-adjusted returns and lowering the standard deviation, value-at-risk (VaR), and conditional value-at-risk (CVaR).　

This study analyzes the return and volatility spillover effects transmitted from stock, crude oil, and gold to the environmental, social, and corporate governance (ESG) index in the USA and Europe based on the Diebold and Yilmaz approach and the Barunik and Krehlik methodology. We find that the total spillover effects of the ESG index return in the USA are higher than those in Europe, while the volatility spillover effects of the European ESG index are higher than those of the USA ESG index. The stock market transmits the highest return and volatility spillover effects to the ESG index in both regions. In the frequency domain, the majority of the return spillover effects of the ESG index are concentrated in the short term, while the majority of volatility spillover effects appear in the long term. The time-varying volatility spillover effects of the ESG index change more rapidly and dramatically than the return spillover effects during the turmoil period in our sample. With the growing environmental pollution, climate change, ecological imbalances, environmental problems, and sustainable social development are of great concern. Investors have realized the significance of sustainability and shift toward sustainable investments in the last ten years. Sustainable investment refers to a new type of investment that incorporates sustainability into capital markets, which incorporates environmental, social, and corporate governance (ESG) factors into investment activities.

Though studies have progressively shown that the ESG (environmental, social, and governance) index can bring more stock return, the literature about the connectedness between ESG and financial market or macroeconomics is insufficient. Therefore, the relevance of ESG to macroeconomics and financial markets needs to be studied so that policymakers can consider certain preferential policies, and investors can also consider whether ESG is a good investment choice. We use the weekly data from July 2009 to November 2020 to measure the spillover among MSCIESG (MSCI USA ESG leader index), STLFSI (St. Louis Fed Financial Stress Index), WEI (Weekly Economic Index), WGS1MO (1-Month Treasury Constant Maturity Rate), and WTI (West Texas Intermediate Crude Oil Future Prices) in America. We employ the mixed methodologies of Diebold and Yilmaz in the time domain and of Baruník and Křehlík in the frequency domain—we develop the model using a moving-window. The spillover index shows the spillover effect of crises or impacts in the system. The results show the MSCIESG index return has a huge impact on the financial market, and the volatility system is more susceptible than the return system when a crisis or shock arises. Further, the shocks or crisis in the return system, differing from the previous literature, will have long-term influence. The environmental, social, and governance (ESG) criteria are a series of standards for the company or investor who pursues long-term sustainable benefits. ESG investment refers to an investing behavior in that companies are concerned about environmental issues (climate change, greenhouse effect, environmental crisis, pollution, and renewable resources), social issues (improvement of the working environment, recruitment of diverse talents, a responsibility to local communities, human rights, and animal welfare, etc.), and governance issues (management structure, employee relationships, executive compensation, transparency of management strategies, expansion of information disclosure contents, the value of shareholders’ opinions, etc.), and investments. Many companies focus on reasonable long-term profits. It is increasingly important to study ESG investment because both investors and companies are concerned about ESG concerning sustainability.