IDEAS home Printed from https://ideas.repec.org/a/gam/jrisks/v11y2023i10p182-d1263340.html
   My bibliography  Save this article

An Analysis of Volatility and Risk-Adjusted Returns of ESG Indices in Developed and Emerging Economies

Author

Listed:
  • Hemendra Gupta

    (Department of Finance, Jaipuria Institute of Management, Lucknow 226010, India)

  • Rashmi Chaudhary

    (Department of Finance, Jaipuria Institute of Management, Lucknow 226010, India)

Abstract

The importance of Environmental, Social, and Governance (ESG) aspects in investment decisions has grown significantly in today’s volatile financial market. This study aims to answer the important question of whether investing in ESG-compliant companies is a better option for investors in both developed and emerging markets. This study assesses ESG investment performance in diverse regions, focusing on developed markets with high GDP, specifically the USA, Germany, and Japan, alongside emerging nations, India, Brazil, and China. We compare ESG indices against respective broad market indices, all comprising large and mid-cap stocks. This study employs a variety of risk-adjusted criteria to systematically compare the performance of ESG indices against broad market indices. The evaluation also delves into downside volatility, a crucial factor for portfolio growth. It also explores how news events impact ESG and market indices in developed and emerging economies using the EGARCH model. The findings show that, daily, there is no significant difference in returns between ESG and conventional indices. However, when assessing one-year rolling returns, ESG indices outperform the overall market indices in all countries except Brazil, exhibiting positive alpha and offering better risk-adjusted returns. ESG portfolios also provide more downside risk protection, with higher upside beta than downside beta in most countries (except the USA and India). Furthermore, negative news has a milder impact on the volatility of ESG indices in all of the studied countries except for Germany. This suggests that designing a portfolio based on ESG-compliant companies could be a prudent choice for investors, as it yields relatively better risk-adjusted returns compared to the respective market indices. Furthermore, there is insufficient evidence to definitively establish that the performance of ESG indices varies significantly between developed and emerging markets.

Suggested Citation

  • Hemendra Gupta & Rashmi Chaudhary, 2023. "An Analysis of Volatility and Risk-Adjusted Returns of ESG Indices in Developed and Emerging Economies," Risks, MDPI, vol. 11(10), pages 1-18, October.
  • Handle: RePEc:gam:jrisks:v:11:y:2023:i:10:p:182-:d:1263340
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-9091/11/10/182/pdf
    Download Restriction: no

    File URL: https://www.mdpi.com/2227-9091/11/10/182/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Samuel M. Hartzmark & Abigail B. Sussman, 2019. "Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows," Journal of Finance, American Finance Association, vol. 74(6), pages 2789-2837, December.
    2. Hemendra Gupta & Rashmi Chaudhary, 2022. "An Empirical Study of Volatility in Cryptocurrency Market," JRFM, MDPI, vol. 15(11), pages 1-14, November.
    3. Nils Engelhardt & Jens Ekkenga & Peter Posch, 2021. "ESG Ratings and Stock Performance during the COVID-19 Crisis," Sustainability, MDPI, vol. 13(13), pages 1-15, June.
    4. Broadstock, David C. & Chan, Kalok & Cheng, Louis T.W. & Wang, Xiaowei, 2021. "The role of ESG performance during times of financial crisis: Evidence from COVID-19 in China," Finance Research Letters, Elsevier, vol. 38(C).
    5. Abdessamad Ouchen, 2022. "Is the ESG portfolio less turbulent than a market benchmark portfolio?," Risk Management, Palgrave Macmillan, vol. 24(1), pages 1-33, March.
    6. Joanna Górka & Katarzyna Kuziak, 2022. "Volatility Modeling and Dependence Structure of ESG and Conventional Investments," Risks, MDPI, vol. 10(1), pages 1-25, January.
    7. Chee Kwong Lau, 2019. "The economic consequences of business sustainability initiatives," Asia Pacific Journal of Management, Springer, vol. 36(4), pages 937-970, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hamzeh F. Assous, 2022. "Saudi Green Banks and Stock Return Volatility: GLE Algorithm and Neural Network Models," Economies, MDPI, vol. 10(10), pages 1-18, October.
    2. Biasin, Massimo & Delle Foglie, Andrea & Giacomini, Emanuela, 2024. "Addressing climate challenges through ESG-real estate investment strategies: An asset allocation perspective," Finance Research Letters, Elsevier, vol. 63(C).
    3. Fabio Pisani & Giorgia Russo, 2021. "Sustainable Finance and COVID-19: The Reaction of ESG Funds to the 2020 Crisis," Sustainability, MDPI, vol. 13(23), pages 1-18, November.
    4. Andrea Jacob & Martin Nerlinger, 2021. "Investors’ Delight? Climate Risk in Stock Valuation during COVID-19 and Beyond," Sustainability, MDPI, vol. 13(21), pages 1-17, November.
    5. Maria Rodionova & Angi Skhvediani & Tatiana Kudryavtseva, 2022. "ESG as a Booster for Logistics Stock Returns—Evidence from the US Stock Market," Sustainability, MDPI, vol. 14(19), pages 1-26, September.
    6. Liu, Lian & Nemoto, Naoko & Lu, Changrong, 2023. "The Effect of ESG performance on the stock market during the COVID-19 Pandemic — Evidence from Japan," Economic Analysis and Policy, Elsevier, vol. 79(C), pages 702-712.
    7. Rim El Khoury & Nohade Nasrallah & Khaled Hussainey, 2022. "Exploring the performance of responsible companies in G20 during the COVID-19 outbreak," Post-Print hal-03761427, HAL.
    8. Simona Malovana & Dominika Ehrenbergerova & Zuzana Gric, 2023. "What Do Economists Think About the Green Transition? Exploring the Impact of Environmental Awareness," Working Papers 2023/6, Czech National Bank.
    9. Costanza Torricelli & Beatrice Bertelli, 2022. "ESG screening strategies and portfolio performance: how do they fare in periods of financial distress?," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0087, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    10. Khurram, Muhammad Usman & Chen, Lifeng & Abedin, Mohammad Zoynul & Adu, Douglas A. & Lucey, Brian, 2024. "ESG disclosure and internal pay gap: Empirical evidence from China," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 228-244.
    11. Fariha Jahan & Jungmu Kim, 2023. "Does the Shield Effect of CSR Work in Crises? Evidence in Korea," Sustainability, MDPI, vol. 15(11), pages 1-18, June.
    12. Alberto Barroso del Toro & Laura Vivas Crisol & Xavier Tort-Martorell, 2022. "Comparing the Impacts of Sustainability Narratives on American and European Energy Shareholders: A Multi-Event Study Analysing Reactions to News before and during COVID-19," Sustainability, MDPI, vol. 14(23), pages 1-18, November.
    13. Teti, Emanuele & Dallocchio, Maurizio & L'Erario, Giulio, 2023. "The impact of ESG tilting on the performance of stock portfolios in times of crisis," Finance Research Letters, Elsevier, vol. 52(C).
    14. Lestari, Jenjang Sri & Frömmel, Michael, 2024. "Socially responsible investments: doing good while doing well in developed versus emerging markets?," Research in International Business and Finance, Elsevier, vol. 69(C).
    15. Zeng, Yongliang & Zhao, Xiangfang & Zhu, Yiwen, 2023. "Equity incentives and ESG performance: Evidence from China," Finance Research Letters, Elsevier, vol. 58(PC).
    16. Qian, Kun & Shi, Bingjie & Song, Yunling & Wu, Hao, 2023. "ESG performance and loan contracting in an emerging market," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    17. Konstantinos Petridis & Nikolaos Kiosses & Ioannis Tampakoudis & Fouad Ben Abdelaziz, 2023. "Measuring the efficiency of mutual funds: Does ESG controversies score affect the mutual fund performance during the COVID-19 pandemic?," Operational Research, Springer, vol. 23(3), pages 1-29, September.
    18. Wang, Ren & Bian, Yuxiang & Xiong, Xiong, 2024. "Impact of ESG preferences on investments and emissions in a DSGE framework," Economic Modelling, Elsevier, vol. 135(C).
    19. Tatarnikova, Olga & Duchêne, Sébastien & Sentis, Patrick & Willinger, Marc, 2023. "Portfolio instability and socially responsible investment: Experiments with financial professionals and students," Journal of Economic Dynamics and Control, Elsevier, vol. 153(C).
    20. Hamzeh Al Amosh & Saleh F. A. Khatib & Husam Ananzeh, 2024. "Terrorist attacks and environmental social and governance performance: Evidence from cross‐country panel data," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(1), pages 210-223, January.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jrisks:v:11:y:2023:i:10:p:182-:d:1263340. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.