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

Author

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  • 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
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    References listed on IDEAS

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    Cited by:

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    2. Barbara Iannone & Pierdomenico Duttilo & Stefano Antonio Gattone, 2025. "Evaluating the resilience of ESG investments in European Markets during turmoil periods," Papers 2501.03269, arXiv.org.
    3. Hossein Tarighi & Grzegorz Zimon & Mohammad Javad Sheikh & Mohammad Sayrani, 2024. "The Impact of Firm Risk and the COVID-19 Crisis on Working Capital Management Strategies: Evidence from a Market Affected by Economic Uncertainty," Risks, MDPI, vol. 12(4), pages 1-33, April.

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