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Performance of European Socially Responsible Funds during Market Crises: Evidence from France
Abstract
This paper investigates the performance, investment styles and managerial abilities of French socially responsible investment (SRI) funds investing in Europe during crisis and non-crisis periods. Our results show that SRI funds significantly underperform characteristics-matched conventional funds during non-crisis periods, but match the performance of their peers during market downturns. The underperformance of SRI funds during good economic states is driven by funds that use negative screens, since funds that use only positive screens perform similarly to conventional funds across different market conditions. SRI and conventional funds show significant differences in risk exposures during non-crisis periods but exhibit much more similar investment styles during crises. Furthermore, we find little evidence of significant differences in managerial abilities during bad economic states. Yet, during non-crisis periods, SRI and conventional fund managers exhibit significantly different style-timing abilities and these differences are also related to screening strategies.
... Their results indicated that higher CSR scores are associated with lower bankruptcy risk for banks. Leite and Cortez (2015) closely examined the dynamics between SRI and corporate risk, suggesting that companies striving for socially responsible practices might face increased bankruptcy risk and capital withdrawals from investors. Their analysis points to the fact that mechanisms related to social and environmental obligations may incur additional costs for companies, potentially constraining their financial flexibility and ability to cope with economic and operational challenges. ...
... Other studies have confirmed that SRI has a positive impact on financial performance as it generates long-term financial value and decreases bankruptcy risk (Bannier et al., 2019;Becchetti, Ciciretti, Dalò, & Herzel, 2015;Giese et al., 2019;Kabir & Chowdhury, 2023;Kreander, Gray, Power, & Sinclair, 2005;Mallin, Saadouni, & Briston, 1995). Additional publications assert that SRI has a negative impact on financial performance by increasing risk rates; authors found that European and French SRI funds present higher systematic risk than conventional investments (Leite & Cortez, 2015;Nofsinger & Varma, 2014). The disparity of results concerning the impact of SRI on financial performance leads us to pose the following research question: ...
... However, the results of Bauer et al. (2006); Gregory and Whittaker (2007); Kempf and Osthoff (2008);Chentoufi, Zari, and Tikouk (2022); Chentoufi and Zari (2020); Chang and Witte (2010) and Leite and Cortez (2014) indicate that SRI funds invested in company stocks are well ranked and have lower systematic risk compared to conventional investments. The same result for Leite and Cortez (2015), who directed their work on SRI investments in Euro zone companies, they found that the latter showed a lower return than that of conventional investments. This is explicable by the ability of SRI managers to foresee market changes, which will undoubtedly increase the profitability of the investments by keeping their betas higher in a bull market and lower in a bear market. ...
This study examines the relationship between socially responsible investment (SRI) and financial risk in listed Moroccan companies. While SRI is often considered less risky than conventional investments (CI), the study aims to understand why this is the case. The analysis takes into account two aspects of risk: specific risk and systematic risk. Specific risks are assessed in terms of the complexity associated with managing SRI and how certain features can mitigate this risk and improve financial performance. Systematic risk is explored in relation to investment diversification while taking ethical considerations into account. The study aims to determine whether the application of social responsibility (SR) criteria to assets reduces diversification and increases risk. Using panel data modeling, the study confirms a positive impact of SR on corporate risk. Specifically, it finds that the "Top Performing CSR" trophy (indicating a high commitment to CSR) has a positive effect on "systematic risk" and that the "CGEM CSR label" (indicating a commitment to CSR) has a positive effect on "specific risk.” In conclusion, the study establishes a positive correlation between social responsibility and investment risk. Companies that adhere to ethical standards tend to present higher levels of risk. This is explained by the complexity of managing socially responsible investments to achieve an optimal level of risk and by the limited diversification resulting from the application of ethical criteria.
... Conforme demonstrado na literatura, os desempenhos dos fundos SRI não são estatisticamente diferentes dos seus pares convencionais (Renneboog et al., 2008a;Leite & Cortez, 2014Reddy et al., 2017;Silva & Iquiapaza, 2017;Syed, 2017). No entanto, em períodos de crise de mercado, os fundos SRI podem superar seus pares (Nofsinger & Varma, 2014) e ter desempenho inferior em momentos sem crise (Renneboog et al., 2008a;Leite & Cortez, 2015). ...
... Posto isso, apesar de não haver diferenças estatísticas entre o desempenho dos fundos SRI e os retornos dos fundos convencionais, em cenários distintos do mercado, os fundos, cujas carteiras são baseadas em investimentos socialmente responsáveis, podem performar distintamente de seus pares. Isso significa que os fundos SRI tendem a ter desempenho inferior aos seus benchmarks (Renneboog et al., 2008a;Leite & Cortez, 2015) ou ainda se manter melhores do que seus pares durante as desacelerações do mercado (Nofsinger & Varma, 2014;Becchetti et al., 2015). ...
... Ademais, essas empresas socialmente responsáveis tendem a estabelecer relações mais estáveis com as comunidades e com os reguladores e, consequentemente, podem ser menos propensas a sofrer com as desacelerações do mercado (Nofsinger & Varma, 2014). Desse modo, alguns pesquisadores demonstram que os fundos mútuos têm um melhor desempenho durante as retrações do mercado (Glode, 2010;Kosowski, 2011), sobretudo os fundos verdes (Leite & Cortez, 2015;Silva & Cortez, 2016). Leite e Cortez (2015) revelaram que os fundos SRI franceses performaram melhor durante as restrições financeiras do mercado. ...
... Also, the restrictions SRI fund managers due to screening can lead them to implement market timing strategies. Leite and Cortez (2015) highlight higher abilities of managers of French SRI funds to time the market during good economic states. Muñoz et al. (2014) point out that green SRI fund managers are generally unable to implement successful stock-picking and market-timing strategies. ...
... lower) degree of greenness. Given managers of greener funds applied screens or even follow thematic approaches that significantly restrict the investment universe (Leite and Cortez, 2015;Lesser et al., 2016), they have lower potential for diversification (Muñoz, 2021). This reduced diversification may also result from a higher stock selectivity of better-informed managers who select stocks of companies, which face lower carbon risks and are even innovative environmental pioneers (Ibikunle and Steffen, 2017) as thematic approaches may promise. ...
... Specifically, we follow Muñoz et al. (2014), Leite and Cortez (2015) and incorporate a dummy Active in (3) that allow an investigation of timing abilities in relation to the market and to the active investment style as shown in the following expression: 12 , 1 2 3 4 5 6 7 8 9 10 11 12 13 ...
We explore how European SRI funds go green between 2015 and 2021. To this end, we investigate the main determinants of their degree of greenness at a stock level, for which a new de facto measure is derived using k-means clustering. Overall, our results reveal that greening SRI funds depends on specific investment styles and salient manager experience in SRI. We document that such greening relies on higher stock selectivity leading managers to outweighing (resp. underweighting) green (resp. fossil fuel) stocks in SRI fund portfolio and reduce its diversification level. In terms of market timing abilities, we find that active strategies make SRI fund greener in normal conditions. Finally, we show that the more (resp. less) the manager is experienced in SRI (resp. mutual fund) industry, the greener the fund is. Conversely, the gender of the manager does not impact fund greenness.
... The performance of ESG investments represents a large field of study (Sabbaghi, 2020;Sturm and Field, 2018), with a growing interest in performance over turbulent times, such as financial crises (Nofsinger and Varma, 2014;Leite and Cortez, 2015;Lins et al., 2017;Matall ın-S aez et al., 2019;Lean and Pizzutilo, 2020) and market shocks (Nakai et al., 2016;Omura et al., 2020;Singh, 2020;Akhtaruzzaman et al., 2021a). Supporters of ESG investments argue that a good commitment to ESG values provides an insurance role when bear market conditions occur (Bouslah et al., 2018), thanks to the production of a sort of moral capital among firm stakeholders (Godfrey, 2005;Godfrey et al., 2009) or a loyal relationship with stakeholders (Flammer, 2015). ...
... Findings around the performance of ESG investments over bear market conditions, however, are not conclusive and they are mostly obtained comparing ESG investments against traditional peers (Sturm and Field, 2018), such as low ESG engaged firms, conventional funds and parent indexes. A preference for ESG investments (Nofsinger and Varma, 2014;Nakai et al., 2016) alternates with a substantial indifference in choosing ESG or traditional investments (Leite and Cortez, 2015;Lean and Pizzutilo, 2020). ...
... Good governance has been recognized as able to improve reputation (Nofsinger and Varma, 2014) and to protect firms when bear market conditions occur (Ducassy, 2013;Nofsinger and Varma, 2014;Leite and Cortez, 2015). Similarly, good environmental performance may protect firms when an environmental accident occurs (Flammer, 2013) and more generally, green assets (or green energies) are considered an alternative to fossil fuel assets: when the price of fossil fuel assets increases, the investments in green energy are incentivized due to a substitution effect between such green and fossil fuel assets (Ferrer et al., 2018;Xia et al., 2019). ...
Purpose
The aim of the paper is to investigate the risk-hedging and/or safe haven properties of environmental, social and governance (ESG) index during the COVID-19 in China.
Design/methodology/approach
This paper employs the DCC, VCC, CCC as well as Newey–West estimator regression.
Findings
The findings provide empirical evidence of the risk hedging properties of ESG indexes as well as of the environmental, social and governance thematic indexes during the outbreak of the COVID-19 crisis. The results also support the superior risk hedging properties of ESG indexes over cryptocurrency. However, the authors do not find any safe haven properties of ESG, Bitcoin, gold and West Texas Intermediate (WTI).
Practical implications
The paper offers therefore, practical policy implications for asset managers, central bankers and investors suggesting the pandemic risk-hedging opportunities of ESG investments.
Originality/value
The study represents one of the first empirical contributions examining safe-haven and hedging properties of ESG indexes compared to traditional and innovative safe haven assets, during the eruption of the COVID-19 crisis.
... On the global level, France was one of the pioneers of the adoption of sustainable investing rules (Crifo, Durand et al., 2019). The development of the sector was boosted by the establishment of the French CSR rating agency (Arese, later after the merger transformed into Vigeo) as well as Novethicdthink tank and media platform dedicated to the sustainability issues (Crifo, Escrig-Olmedo et al., 2019;Leite & Cortez, 2015;Petrillo et al., 2016). ...
... In one of the first and earliest publications on the topic (updating their previous analysis, with similar conclusions), Amenc and Le Sourd (2010) concluded underperformance of French sustainable funds in the period covering the 2008 global financial crisis and the considerable volatility of the prices of their shares. Nevertheless, Leite and Cortez (2015) showed that during the crisis periods the performance of both French sustainable and conventional equity funds was comparable. Nevertheless, the differences could be noticed in the noncrisis periods, with the poorer performance of the ESG funds, in particular the ones following a negative screening approach. ...
... On the global level, France was one of the pioneers of the adoption of sustainable investing rules (Crifo, Durand et al., 2019). The development of the sector was boosted by the establishment of the French CSR rating agency (Arese, later after the merger transformed into Vigeo) as well as Novethicdthink tank and media platform dedicated to the sustainability issues (Crifo, Escrig-Olmedo et al., 2019;Leite & Cortez, 2015;Petrillo et al., 2016). ...
... In one of the first and earliest publications on the topic (updating their previous analysis, with similar conclusions), Amenc and Le Sourd (2010) concluded underperformance of French sustainable funds in the period covering the 2008 global financial crisis and the considerable volatility of the prices of their shares. Nevertheless, Leite and Cortez (2015) showed that during the crisis periods the performance of both French sustainable and conventional equity funds was comparable. Nevertheless, the differences could be noticed in the noncrisis periods, with the poorer performance of the ESG funds, in particular the ones following a negative screening approach. ...
... On the global level, France was one of the pioneers of the adoption of sustainable investing rules (Crifo, Durand et al., 2019). The development of the sector was boosted by the establishment of the French CSR rating agency (Arese, later after the merger transformed into Vigeo) as well as Novethicdthink tank and media platform dedicated to the sustainability issues (Crifo, Escrig-Olmedo et al., 2019;Leite & Cortez, 2015;Petrillo et al., 2016). ...
... In one of the first and earliest publications on the topic (updating their previous analysis, with similar conclusions), Amenc and Le Sourd (2010) concluded underperformance of French sustainable funds in the period covering the 2008 global financial crisis and the considerable volatility of the prices of their shares. Nevertheless, Leite and Cortez (2015) showed that during the crisis periods the performance of both French sustainable and conventional equity funds was comparable. Nevertheless, the differences could be noticed in the noncrisis periods, with the poorer performance of the ESG funds, in particular the ones following a negative screening approach. ...
... Leite and Cortez [13] investigate the performance, investment styles and managerial abilities of French socially responsible investment funds investing in Europe during crisis and non-crisis periods and in another article-internationally oriented socially responsible investment funds, domiciled in eight European markets, in comparison with characteristicsmatched conventional funds. To evaluate fund performance, they used a 5-factor model that incorporates an additional local factor (the difference in the returns of a local market index and the Global/European index used as benchmark) into the Carhart [12] 4-factor model. ...
... Similarly to Leite and Cortez [13], for funds invested in the European region, the riskfree rate was proxied by the 1-month Euribor (euro interbank offered rate). Market returns were proxied by the MSCI Europe index. ...
The modern development of the investment funds industry is underpinned by the understanding of the efficiency and quality of asset management regarding the use of various investment strategies. The purpose of the article is to examine investment strategy performance in equity funds domiciled in Poland using standard relative and absolute measures. The proposed method uses the Sharpe ratios, the Treynor ratio and the Jensen ratios. The research covers investment funds, spanning the period 2017–2021. The study (using the Sharpe and Traynor ratios) finds that the financial instruments for investment funds domiciled in Poland may be attractive to conservative investors, as they provide excessive returns compared to the returns of risk-free assets and inflation, but for riskier investors, most of the investment funds analyzed were unattractive (negative value of the returns of funds compared to stock indices). Absolute measures of fund performance, using the Jensen ratio, are limited for comparing all groups of investment strategies. A specific negative feature in the study of investment strategies based on the Jensen ratio is their inefficiency, that is, all statistically significant values of this ratio are negative. The management of ESG-funds with investments in the European financial market was more efficient than most conventional investment funds.
... That several financial services markets have included socially responsible and sustainable investments in both emerging as well as developed jurisdictions. Such positive impact portfolios may usually offer low risk, return investment prospects, ranging from below market to market rate, depending on the individual investors' strategic goals (Leite & Cortez, 2015). ...
... SRI and conventional funds show significant differences in risk exposures during non-crisis periods but exhibit much more similar investment styles during crises. SRI funds significantly underperform characteristicsmatched conventional funds during non-crisis periods, but match the performance of their peers during market downturns (Leite & Cortez, 2015). ...
Wide range of issues that some years ago were considered 'non-financial' such as climate change, environment, biodiversity, human rights and fair wages and remuneration are now coming to the fore as factors that can have a significant impact on investment value. Globally, there has been an increase in the number of large-scale market participants who have become socially conscious and want to allocate their investments toward businesses that acknowledge the relevance of environmental, social, and governance (ESG) factors. In line with what's happening globally, India too is witnessing an increasing focus on ESG, especially after Covid-19 emerged as a pandemic. AUM of Indian ESG mutual funds increased from ₹ 2747.66 Cr as on 31 st January 2020 to ₹ 12,544.02 Cr on 31 st December 2021, which as a percentage of the total AUM of the Indian Mutual Fund industry increased from 0.10% to 0.33% during this period. We try to find out whether the Post Covid Surge in AUM of ESG Mutual Funds in India indicates a Structural Break. Our findings, based on Chow Test outcomes, confirm that this surge is indeed a structural change.
... Studies such as (Jain & Wu, 2000;Sauer, 1997;Vos, Brown & Christie, 1995) have failed to exhibit significant evidence of performance persistence. Leite and Cortez (2015) examine the French socially responsible investment (SRI) and conventional funds investment styles and timing ability during the financial and non-financial crises from 2001 to 2012. The study finds little evidence of significant style timing ability. ...
The present study verifies the short-term persistence performance of equity mutual fund returns. The study considers 47 equity funds' monthly excess returns spanning from January 2000 to December 2019. The study employs prominent asset pricing models such as Jensen (1968) one-factor model, Fama-French (1993) three-factor model, and Carhart (1997) four-factor model to capture the short-term persistence of equity mutual fund returns. The results show that Jensen’s one-factor and Fama-French three-factor models are explaining a better persistence performance in the Indian context.
... In the same way as Leite and Cortez (2015), to split alpha and beta estimates for crisis and non-crisis phases, we included two dummy variables in regression (1) and obtained the equation below: ...
This paper presents a comprehensive investigation into the performance of multi-asset funds investing internationally. Based on a custom-built conditional multi-factor model, which includes several bond and equity-related factors, along with time-varying betas and alphas, we show that funds in our dataset significantly underperform from 2004 to 2021. This evidence holds even on a before-fee basis, with funds investing predominantly in bonds exhibiting significantly higher alphas than funds investing predominantly in equities. Since multi-asset funds may better hedge against market downturns than equity or bond funds, given their higher asset class diversification, we also evaluate performance for crisis and non-crisis phases separately. The results show that, during market crises, international multi-asset funds perform significantly better than in non-crisis times, achieving neutral performance. However, while funds that favour bond investments perform similarly across different market phases, funds that prioritize equity investments perform significantly better during crises. Consequently, multi-asset funds with higher bond holdings can be a better option during non-crisis periods, while funds with higher equity holdings should be preferred during market downturns. This somewhat puzzling finding seems to be related to funds’ cash holdings. By providing a better understanding of the asset allocation decisions of international mutual fund managers, as well as of their impact on fund performance, this work has meaningful implications for investors.
... Constant ESG stocks supervision and monitoring by competent authorities contributes to higher returns and lower volatility (Díaz et al. 2021). However, there are elder studies concluding that ESG monitoring may result in lower portfolio performance of ESG assets compared to traditional ones (Leite and Cortez 2015;Auer 2016). ...
In times of intense economic variability and social turbulence worldwide, this paper aims to examine the existence of transient correlations and interdependencies between the most important MSCI ESG indices worldwide and the most important commodities’ index, economic uncertainty, natural gas, gold, and VIX, in a geographical and social context during two recent crises: the COVID-19 pandemic and the energy crisis due to the Ukrainian war. Using daily data from 3 January 2020 and extending until 23 August 2022, this study applies a wavelet coherence approach to analyze time series co-movements, in order to emphasize all possible combinations’ correlations and achieve more accurate outcomes at any given time and frequency band simultaneously and spontaneously. The results show robust coherence between different geographical areas, time, and frequency bands, indicating both positive and negative correlations with most of the combined ESG indices and other economic indicators. The study suggests that stock indices of leading ESG companies in North America and Europe constitute a safe investment haven during major upheavals and crises, providing a way for investors to manage risk and generate positive returns while contributing to economic sustainability.
... The growing role of ESG investments has given rise to a new literature that analyzes whether ESG indices outperform conventional indices (Pé rez-Gladish et al., 2013; Durá n-Santomil et al., 2019). ESG indices underperform in normal times, while in turbulent times, such as the 2007 global financial crisis, they outperform conventional indices because they play an "insurance role" (Nofsinger & Varma, 2014;Becchetti et al., 2015;Leite & Cortez, 2015). Dios-Alija et al. (2021) analyzed monthly and weekly sustainable and conventional indexes of the Dow Jones, Eurostoxx, and Hang Seng; high levels of persistence were observed in all cases, and no differences were detected between markets. ...
This paper examines the asymmetric effect of economic policy uncertainty, geopolitical risk, and climate policy uncertainty on the volatility of the S&P 500 stock index, before and after the launch of the S&P 500 ESG Index, by using a Non-linear Autoregressive Distributed Lag (NARDL) model, for the period January 2010 to august 2022.We provide evidence on the asymmetric impact of climate policy uncertainty on the volatility of the S&P 500 both in the short-run and in the long-run, and this asymmetry is more frequent after the launch of the S&P 500 ESG Index. Moreover, in the long-run, a decrease in the economic policy uncertainty after the launch of the S&P 500 ESG has greater effect on volatility of the S&P 500, than the short-run. We also find that positive and negative shocks to geopolitical risk before and after the launch of the S&P500 ESG index do not affect the volatility of the S&P 500 stock market index in the short -run and long.
... Following Leite and Cortez (2015), we have obtained alpha and beta estimates in the crisis and non-crisis phases separately by adding two dummy variables to all the previous equations. Based on the 6-factor model, we have obtained the benchmark alphas, the unadjusted fund alphas, and the benchmark-adjusted fund alphas through equations [4], [5] and [6], respectively: ...
Most mutual fund performance evaluation studies interpret fund alphas as the incremental performance of managers in relation to passive benchmark indices, which should exhibit statistically insignificant alphas. However, if these indices present significant non-zero alphas, standard (non-adjusted) fund alphas are biased. This paper investigates the impact of using benchmark-adjusted alphas to assess the performance of Portuguese-based mutual funds, investing in domestic and European equities. For the period 2000-2020, our results show that fund benchmarks exhibit significantly negative alphas, which lead to an underestimation of mutual fund performance when employing standard models. As a result, benchmark-adjusted alphas are significantly higher than unadjusted alphas for both fund categories, though the differences are larger for domestic than for European funds. We have also found that the impact of the benchmark-adjustment procedure depends on the state of markets. The domestic (European) benchmark exhibits considerably lower (higher) alphas during crisis than during non-crisis periods. During market crises, the differences between pre- and post-adjustment alphas are statistically significant only for domestic funds, whereas during non-crisis periods, both fund categories exhibit significant performance improvements. Our findings suggest that the benchmark-adjustment procedure has a higher impact when benchmark indices exhibit higher concentration.
... Similar to Leite and Cortez [67], the risk-free interest rate for funds investing in the China region is the yield on 10-year government bonds. Market risk refers to the unpredictability brought on by shifts in the market's direction. ...
The number and size of China’s commercial retirement Fund of Funds (FOFs) have exploded since 2018, reflecting a dearth of Chinese retirement products and widespread retirement anxiety among individual investors. Therefore, the performance of retirement FOFs continues to garner widespread interest from academia and society. This study evaluates the performance and sustainability of the investment strategies employed by China’s retirement FOFs using standard relative and absolute measures. The Sharpe ratio, Treynor ratio, and Jensen’s alpha are used as performance measurement standards, and the sustainability of performance is evaluated using the performance dichotomy, cross-sectional regression, and Spearman rank correlation coefficient methods. Target-risk FOFs for retirement are categorized into four groups: conservative, stable, balanced, and aggressive, with each group assuming progressively greater levels of risk. In evaluating fund performance, it was determined that the aggressive and stable groups of funds generated greater excess returns (as indicated by the inflation-adjusted Sharpe ratio). Additionally, the stable group of funds generated greater investment returns than the other groups (as all statistically significant alpha values for Jensen were positive). When evaluating the sustainability of fund performance, it was determined that the stable and balanced group funds exhibited the least sustainable performance. During the economic recession caused by the COVID-19 pandemic between 2020 and 2021, there were multiple fund performance ranking reversals (with significantly negative cross-sectional regression coefficients and Spearman coefficients). In the second half of 2022, the fund’s performance exhibited signs of sustainability (as indicated by significant performance dichotomy test values and positively significant Spearman coefficients). Still, this trend did not persist into 2023. Summarizing the different performance indicator results reveals that the stable group is the most worthwhile fund group to purchase among the four groups. Also, given that the historical performance of a signal fund is not sustainable, the investors should diversify their investments in this group and try to obtain the average return of the stable strategy to achieve the goal of supplementing retirement.
... Considering the effect of CSR scores on stock returns during the 2007-08 financial crisis, Lins et al. (2017) evaluated 1673 U.S. non-financial firms and provided evidence that firms with higher CSR scores presented significantly higher returns compared to firms with lower CSR scores. Leite and Cortez (2015), for a sample of French funds investing in Europe, provided evidence that SRI funds underperformed conventional funds during non-crisis periods, whereas SRI funds matched the performance of their conventional peers during periods of market downturns. ...
This research investigates the influence of Environmental, Social, and Governance (ESG) performance on mutual fund efficiency during the COVID-19 pandemic. Employing Data Envelopment Analysis (DEA) and hypothesis testing, we examine the effect of ESG controversies scores on mutual fund performance. Our sample comprises 17,961 mutual funds worldwide, with available data during the later phase of the pandemic. Mutual fund performance is evaluated using the DEA methodology, and efficiency scores are derived from the DEA portfolio efficiency index. To explore the impact of ESG controversies scores on mutual fund performance, the sample is divided into two categories based on the ESG controversies score quartile. The findings demonstrate that mutual funds with higher ESG controversies scores, which indicate fewer ESG controversies, outperformed those with lower scores. Specifically, mutual funds embroiled in fewer ESG controversies exhibited higher financial efficiency, regardless of their geographical investment area. These findings offer essential insights for both investors and mutual fund managers. Retail and institutional investors could recognize the potential performance gains associated with investing in socially responsible mutual funds during crisis periods such as the COVID-19 pandemic. Furthermore, mutual fund managers should consider avoiding securities with more ESG controversies in their portfolios, considering that ESG controversies could have an adverse impact on financial efficiency during periods of health, environmental, or market crises. While our study contributes valuable insights, it is subject to limitations due to the unavailability of time-series data for mutual funds during the COVID-19 pandemic. Nonetheless, it represents the first attempt to utilize the ESG controversies score as a determinant of mutual fund financial efficiency during the pandemic era.
... A year later, Utz et al. (2014) theorized in their final results that conventional and socially responsible investment funds do not achieve significant differences in fund performance. leite and Cortez (2015) presented results in which SRI funds demonstrated to perform significantly worse than conventional funds during non-crisis periods but matched their counterparts during market declines. Nofsinger and Varma (2014) research result also showed that compared to matched conventional mutual funds, socially responsible mutual funds outperform during periods of market crises. ...
Theoretical background: Socially responsible investing (SRI) is a specific type of investment, combining both financial objectives and investor preferences regarding the environment, society, or corporate govern- ance. Since the period following the 2007 global financial crisis, a significant increase in interest in assets that meet SRI policies has been observed, which translated into a shift in the mutual fund products offered. SRI investment funds play a significant role in the SRI market due to the size of assets under management. They also have an indirect impact on the interest of individual investors in the theory of responsible in- vestment by adjusting their offerings adequately.
Purpose of the article: The aim of the study is to determine to what extent the performance of open-ended socially responsible investment funds reflects changes in asset prices on the capital market in Poland. Research methods: The analysis was carried out for the period from 1 January 2020 to 1 January 2022. Daily quotes for SRI funds were used, while only funds that operated continuously during the set period were selected. The WIG and WIGESG indexes were used as stock market benchmarks. Due to the fact that mutual funds are quoted once a day, a simple daily rate of return was used in the study. Using the linear correlation coefficient, a correlation matrix was constructed between the daily returns of the funds and the adopted benchmarks. The study was conducted with the use of the linear regression method to verify the impact of capital market price changes on the returns achieved by SRI mutual funds. Then, using the method of least squares, the model parameters were estimated for SRI funds.
Main findings: The results confirmed the influence of market benchmarks on the development of SRI fund returns in Poland. In addition, the results confirmed that the conventional benchmark (WIG) has a greater impact on fund returns than the ESG benchmark (WIGESG).
... However, other studies (e.g. Leite & Cortez, 2015;Auer, 2016) reveal that ESG screens result in lower portfolio performance of ESG assets relative to benchmarks when diversity is lower. ...
Purpose
This research explores the spillovers and portfolio implications for green bonds and environmental, social and governance (ESG) assets in the context of the rapidly expanding trend in green finance investments and the need for a green recovery in the post-COVID-19 era.
Design/methodology/approach
This study utilizes Diebold and Yilmaz’s (2014) spillover method and portfolio strategies (hedge ratio, optimal weights and hedging effectiveness) for the data starting from February 29, 2012, to March 14, 2022.
Findings
The study’s findings reveal that the lower volatility spillover is evidenced between the green bonds and ESG stocks during tranquil and turbulent periods (e.g. COVID-19 and Russia-Ukraine War). Furthermore, hedging costs are lower both in normal times and during economic slumps. Investing the bulk of the funds in green bonds makes it possible to achieve maximum hedging effectiveness between the S&P green bond (GB) and the S&P 500 ESG.
Practical implications
Both investors and policymakers may use these findings to make wise investment and policy choices to achieve post-COVID environmental sustainability.
Originality/value
Unlike previous research, this is the first to explore the interconnectedness among the major global and country-specific green bonds and ESG assets. The major findings of this study about the lower volatility spillovers and hedging costs between green bonds and ESG assets during the tranquil and turbulent periods may contribute to the post-COVID investment portfolio for environmental sustainability.
... Similar evidence was reported by Su (2021) in the context of green investment stocks in China, where such stocks lagged conventional stocks in terms of returns and exhibited higher downside risks. Capelle-Blancard and Monjon (2014), Henke (2016), Leite and Cortez (2015) and Lesser et al. (2016) have argued that the performance of SRI is related to the screening processes used by the asset manager. ...
Socially Responsible Investments (SRI) have recently generated much interest among asset owners, managers and academicians. Though the Efficient Market Theory suggests that stock prices fully reflect all available information, few existing studies indicate that Environmental, Social and Governance (ESG) portfolios deliver superior risk‐adjusted performance. ESG investing is at a nascent stage in India but is growing rapidly, especially after the COVID‐19 pandemic. Asset managers always face the dilemma of choosing between different screening methods, screening intensities and stock weighting schemes to deliver outperformance. Our study attempts to investigate the impact of these portfolio construction criteria on the risk‐adjusted performance of ESG portfolios in India. Our results show that there exists a trade‐off between superior investment performance and unsystematic risk of ESG portfolios. Investors can benefit from investing in equally‐weighted best‐in‐class portfolios constructed using ESG scores. We highlight the implications of our findings for asset owners, managers, index providers and regulators, and also provide directions for future research in the area of ESG portfolio management.
... The authors found that even leading financial companies do not engage in constructive activities in socially conscious investing and shareholder advocacy. Leite and Cortez (2015) examined the efficiency, investment styles and management capabilities of French SRI funds invested in Europe. Their findings indicate that SRI funds substantially underperform characteristics-matched traditional funds during non-crisis periods. ...
Purpose
This study aims to investigate the relationship between stock markets, environmental, social and governance (ESG) factors and Shariah-compliant in an integrated framework.
Design/methodology/approach
The authors employ the multivariate factor stochastic volatility (mvFSV) framework to extract the volatility of the different sectoral indices. Based on this evidence, the authors employ the quantile vector autoregressive (QVAR) approach to examine the dynamic spillover connectedness among the aforementioned indices.
Findings
The study emphasizes the following major findings: (1) significant time-varying spillover connectedness across quantiles, (2) bidirectional and asymmetric spillover effect among the ESG index and the other sectoral indices, (3) the strength of spillover connectedness is time-varying across quantiles, (4) based on the perspective of portfolio optimization, ESG market is a significant strong forecasting contributor to conventional and Shariah-compliant markets, (5) overall, the findings point out serious quantile pass-through effect among ESG index and the other sectoral indices during the COVID-19 health crisis.
Originality/value
This study extends the previous literature in the following ways. First, to the best of the researchers’ knowledge, none of the existing studies have investigated the relationship between stock markets, ESG factors and Shariah-compliant in an integrated framework. Second, this study extends the previous scholarships by applying the mvFSV. Third, the authors propose a new rolling version to estimate dynamic spillovers, namely the rolling-window quantile VAR method. This approach provides a great advantage in computing the dynamics of return and variance spillover between variables in terms not only of the overall factor but also of the net (pairwise) aspect.
... Despite the rising uncertainties, the increasing trend in sustainable investments may indicate that the ESG portfolios may be considered safe-haven instruments in turmoil periods. In a supporting way, a few papers find that the ESG portfolios show underperformance during market booms, but they perform better than conventional equities during financial crises (Leite and Cortez, 2015;Nofsinger and Varma, 2014). In a recent paper, Broadstock et al. (2021) showed that ESG indices provided positive returns during the COVID-19 pandemic. ...
Purpose
This paper aims to investigate the relationship between sustainable investments and a series of uncertainties from January 2014 to December 2021, including many economic and political turbulences and the COVID-19 pandemic.
Design/methodology/approach
The authors use Rényi’s transfer entropy method, a nonparametric flexible tool that considers both the center distribution and lower quantiles, capturing extreme rare events that give additional insights to analysis.
Findings
The authors’ results indicate significant bidirectional information transmissions between the crude oil volatility and sustainability indices. The authors report information flows between the cryptocurrency uncertainty and sustainability indices considering tail events. The results are essential for market participants making decisions during turbulent times.
Originality/value
This paper is carried out for a variety of uncertainty measures and environmental, social and governance (ESG) portfolios of both developed and developing markets. It adds to literature in terms of methodology used. Rényi’s transfer entropy methodology is first used to measure the relationship between uncertainties and ESG investments.
... Finally, a supporting (positive) viewpoint is spreading and assert that sustainable investors might benefit from firms' "good reputation and sustainable competitive advantage" (Wu et al., 2017) also during market shocks (Nofsinger and Varma, 2014). Empirical literature supports the three viewpoints considering sustainable portfolio performance indices (Cunha et al., 2020) during market downturns (Leite and Cortez, 2015) and recovery (Wu et al., 2017). ...
Purpose
This paper sets out to investigate investors' sustainable preferences under different market conditions. Specifically, the authors examine the existence of a positive sustainable asset pricing gap, and whether it is influenced by the socioeconomic and financial sentiments. The increase of uncertainty rises investors' skepticism whether sustainable companies are under-performing the traditional counterparts, causing larger increasing gap. Conversely, if sustainable assets are overperforming, the increase of market uncertainty raises investors' sustainable preferences.
Design/methodology/approach
The authors examine the existence of a positive sustainable asset pricing gap, and whether it is influenced by the socioeconomic and financial sentiments. Through a quantile regression, the authors remark the variability of sustainable preferences where market participants, although recognizing the present and future value added of sustainable investing, also show skepticism (i.e. asymmetric tail behavior). However, the analysis of the total change of sustainable investments returns over time demonstrates the emergence of positive viewpoints incentivized by economic and market uncertainty.
Findings
The market-driven social responsibility exalts the positive insights regarding the future of sustainable developments. As the authors discuss along the paper, investors are gaining awareness about the environmental and social goals pursued by socially responsible companies. Hence, the authors consider how economic instability might stimulate the assessment of the social and environmental impact of the unsustainable production systems, switching investments toward virtuous sustainable companies. This could generate a series of positive externalities that might improve the welfare conditions of the whole society.
Originality/value
The authors conduct an original empirical exercise, combining different techniques (i.e. quantile regressions and wavelet analysis). To the best of the authors’ knowledge, this is the first paper trying to evidence a systematic connection between market uncertainty and sustainable preferences accounting for different market states (thanks to quantile regressions).
... Following the global financial crisis, evidence confirmed that ESG equities stood more resilient to shocks in oil or commodity prices (Crifo and Forget, 2012). Some papers note an underperformance for ESG portfolios during the market booms; however, they perform better than conventional equities during financial crises (Nofsinger and Varma, 2014;Leite and Cortez, 2015). COVID-19 outbreak has been no exception, and ESG indices provided positive returns during this downturn (Broadstock et al., 2020). ...
Purpose
The purpose of this study is to examine the dynamic connectedness and volatility spillovers between commodities and corporations exhibiting the best environmental, social and governance (ESG) practices. In addition, the authors determine the optimal hedge ratios and portfolio weights for ESG and commodity investors and portfolio managers.
Design/methodology/approach
This study uses the novel frequency connectedness framework to point out volatility spillover between ESG indices covering the USA, developed and emerging markets and commodity indices, including energy (crude oil, natural gas and heating oil), industrial metals (aluminum, copper, zinc, nickel and lead) and precious metals (gold and silver) by using daily data between January 3, 2011 and May 26, 2021, covering significant socio-economic developments and the COVID-19 outbreak.
Findings
The results of this study suggest a total connectedness index at a mediocre level, mainly driven by the shocks creating uncertainty in the short term. And the results indicate that all ESG indices are net volatility transmitters, and all commodity indices other than crude oil and copper are net volatility receivers.
Practical implications
The results imply statistically significant hedging and portfolio diversification opportunities to investors and portfolio managers across the asset classes, proven by the hedging effectiveness analyses.
Social implications
This study provides implications for policymakers focusing on the risk of contagion among the commodity and ESG markets during turbulent periods to ensure international financial stability.
Originality/value
This study contributes to the existing literature by differentiating ESG portfolios as the USA, developed and developing markets and examining dynamic connectedness and volatility spillovers between ESG portfolios and commodities with a different technique. This study also contributes by considering COVID-19 outbreak.
... Based on the research already carried on, the study relating to the CSR and investment performance keeps being revised. Leite and Cortez[14] examine the performance of socially responsible funds and conventional funds from MSCI EMU database from a crisis period to a non-crisis period(2001-2003;2007-2009;2011-2012). During noncrisis period, SR funds underperform the conventional funds. ...
conomic dominance of optimal portfolios over the naïve diversification policy, among others, has been found to depend upon portfolio size (N) as argued by Duchin and Levy (2009) and Nor and Islam (2016). Apart from portfolio model, the benefit of involving corporate social responsibility (CSR) is still in uncertainty until now as argued by Fieseler (2011) and Joan and Thomas (2015). Hence, this paper extends prior literature by proposing a framework which constructs CSR rating using experts’ opinions, and subsequently optimizes portfolios of firms with strong and weak CSR ratings. In consequence, the performances of Sharpe-optimal portfolios are juxtaposed with those of equal-weighted schemes across different sizes. As the result, Sharpe optimal model outperforms the naive diversification in all sample period and all scoring. This paper follows the optimal conditions of Sharpe optimal model documented in prior researches. Besides, the result showed that the bottom CSR scoring portfolio is outperforming the top CSR scoring in all different financial conditions. The study finds that this is due to internal factors such as (companies’ involvement) and external factor (economic factor).
... El Ghoul and Karoui (2016) concluded that high-CSR funds are outperformed by low-CSR ones as their investors derive utility from non-performance attributes. Cortez and Leite (2015) argued that in general ESG indices underperform during normal periods, whilst during turmoil periods such as the 2007 global financial crisis (GFC) they outperform conventional ones because they play an 'insurance role' (Varma and Nofsinger 2014;Becchetti et al. 2015). Abidin and Gan (2017), Junkus and Berry (2015), Rehman et al. (2016) and Schröder (2004) showed that the performance of SRI mutual funds and indices is generally not significantly different from that of conventional ones. ...
This paper uses R/S (Rescaled Range) analysis and fractional integration techniques to examine the persistence of two sets of 12 ESG (Environmental, Social and Governance) and conventional stock price indices from the MSCI ((Morgan Stanley Capital International) database over the period 2007–2020 for a large number of both developed and emerging markets. Both sets of results imply that there are no significant differences between the two types of indices in terms of the degree of persistence and its dynamic behaviour. However, higher persistence is found for the emerging markets examined (especially the BRICS, i.e. Brazil, Russia, India, China and South Africa), which suggests that they are less efficient and thus offer more opportunities for profitable trading strategies. Possible explanations for these findings include different type of companies’ ‘camouflage’ and ‘washing’ (green, blue, pink, social, and Sustainable Development Goals—SDG) in the presence of rather lax regulations for ESG reporting.
... Nofsinger and Varma (2014) inspected the performance of a group of US SRI funds during crisis and non-crisis periods, over the years 2000-2011, demonstrating that conventional funds outperformed SRI funds in non-crisis times, while the reverse was true during crisis periods. Other analyses have acknowledged non-statistically significant performance differences between sustainable and traditional funds during crisis periods (Leite and Cortez, 2015;Matallín-Sáez et al., 2016). ...
In this paper, we discuss the attractiveness of green and sustainable assets, from an investor perspective. Inspired by the current state of the art, with researchers positively (re)considering the added value of stocks associated with the fulfilment of sustainable development goals, we analyze whether such stocks demonstrated: (1) a different and (2) an outperforming dynamic during various stages of the COVID-19 pandemic. In particular, we examine sustainable-indexed assets and companies with a fully bio-based production system, against a counterfactual group of non-indexed activities operating in the same sectors. Asset connectivity is investigated by means of a correlation network, and portfolio optimization is applied to measure profitability. The results show: (1) fewer connections between bio-based assets and the “rest of the world,” suggesting that, given their potential long-term resilience, investors might consider them capable of mitigating COVID-19 systemic risk, and therefore a valid investment to hold; and (2) the effectiveness and profitability of bio-based assets in portfolios. Considering the latter finding, we document a switching effect
after the hard lockdown phase, during which rational investors (seeking an optimal mean–variance) may have inferred the efficacy of capital re-allocation from simply sustainable assets to bio-based companies. Here, we discuss the potential role of the pandemic as an accelerator of the sustainable green transition, considering the welfare implications in terms of socio-economic wellbeing and reduction of negative environmental externalities deriving from the conversion of the traditional production and management system. The profitability of the returns investments might increase the attractiveness of sustainable management organizations, causing the diffusion of these virtuous systems to increase further.
... Whereas Khan et al. (2016) assessed the period from 1993 to 2013, we evaluated the period from 2007 to 2018; our data on materiality scores of firms begin in 2007. Both periods have different market conditions, and prior studies determined that different market states affect the financial performance of SRI portfolios (e.g., Becchetti et al., 2015;Leite and Cortez, 2015;Carvalho and Areal, 2016;Berkman et al., 2021). Since the period of Khan et al. (2016) is longer than ours, turbulent market states, such as the international financial crisis, could be offset by up periods, affecting the results on the financial performance of portfolios over the full sample period. ...
In this study, we address a lesser‐studied aspect of corporate social responsibility (CSR): distinguishing between investments in material versus immaterial CSR issues. The financial performance of stock portfolios formed according to material and general CSR issues is examined over the period 2007 to 2018 in the European Union and the United States. We find that materiality is relevant to finding the best and worst firms both in terms of CSR and financial performance, more significantly in the EU than in the US market. However, general CSR scores, including material and immaterial issues, do not discriminate the best firms.
Purpose
Considering the standards developed by the Sustainability Accounting Standards Board (SASB), this study aims to examine whether the link between material sustainability and financial performance depends on the extent to which the company is oriented toward stakeholders.
Design/methodology/approach
To test the predictions, 13,942 firm-year observations from 43 different countries are used, covering the period from 2010 to 2019. Using a hand-mapping approach to match the indicators suggested by the SASB with those of the ASSET4, the authors realize that there are 170 material sustainability indicators among 466 indicators of the ASSET4. The authors use three different methods to verify if the materiality matters, including the alphas obtained from the Fama and French factor models, comparing the average abnormal returns of the portfolios and the bootstrapped Cramer technique.
Findings
The findings show that companies investing in material sustainability activities perform better than those investing in immaterial activities. Also, consistent with the theoretical foundations, the authors find that the effect of investing in material sustainability activities is more pronounced in stakeholder-oriented countries than that in shareholder-oriented countries. The results are robust to a battery of sensitivity tests.
Research limitations/implications
Owing to COVID-19 in late 2019, data from 2020 to 2022 have not been used to obtain reliable results.
Practical implications
The results obtained in the current research provide valuable guidance for investors to make investments considering the degree of materiality of sustainability activities in different industries. It also helps managers to increase the company’s financial performance, make efficient decisions related to investment in sustainability activities and find investment strategies on the material sustainability issues in their industries.
Social implications
This study provides a clearer understanding of investment in sustainability activities in different industries by separating material and immaterial sustainability activities in stakeholder and shareholder-oriented countries, and the results obtained can change the perspective of investors and company managers regarding investing in such activities in different countries. Investing in more materiality sustainability activities than the immateriality dimension can be new opportunities for companies to achieve predetermined goals, help retain and attract business partners or be a source of innovation for new product lines or services. Internal morale and employee engagement may increase while increasing productivity and firm performance. This discussion opens the way for future research.
Originality/value
This study provides insight into the effect of investing in material and immaterial sustainability activities in different industries on the company’s performance in shareholder and stakeholder-oriented countries.
This paper presents a literature review with the aim of facilitating investment funds to understand the practical question of whether investing responsibly can make a fund's portfolios more sustainable without compromising their return/risk profiles. The study contains most of the leading ESG research from the past two decades. We conclude from this research that the relationship between ESG and return/risk profile is predominantly neutral or even positive. Many scholars have found evidence on the performance of stocks, bonds, and real estate. The findings apply to Environmental, Social, and Governance criteria separately and in different regions. We contribute to the body of knowledge accessible to ESG-asset-seeking funds by complementing the impact investment theory and by linking ESG investment to portfolio-level characteristics and investor preferences. Looking into the future, we identify recent trends and developments in this niche field of ESG at the end of the paper.
"The development of socially responsible investment (SRI) in the mid-1990s opened up a vast area of research in portfolio construction. Indeed, investors are breaking with traditional financial theory by integrating extra-financial elements into their portfolio management strategies. In this sense, the emergence of this new type of investment has triggered a craze in the scientific community about the performance of SRI, which has led to mixed results. One of the possible explanations for this heterogeneity of results is that the methodology employed by the different studies has an inevitable influence on its result, or that the financial performance of SRI can be influenced by the measure of financial performance employed (risk or profitability variable). For this reason, the analysis of our data is conducted using a principal component analysis of financial performance, which permits the construction of a synthetic index that includes most of the variables used to measure financial performance in the empirical literature. The objective here is to capture a general trend in the impact of SRI on this composite index of financial performance. The results of the multivariate test on the composite index show that non-SRI firms have a negative and statistically significant impact on the financial performance index. Similarly, the effect of investments made by Engaged companies has a negative, but not statistically significant impact on financial performance."
The transition towards a more sustainable financial market demands transparency and trust from investors, objectives also pursued by the Sustainable Finance Disclosure Regulation (SFDR). Specifically, carefully assessing the risk‐adjusted performance of sustainable funds empowers investors to make informed decisions in alignment with their ethical and financial objectives. This article contributes to the debate on the performance of socially responsible investment (SRI) funds in times of crisis by evaluating the risk‐adjusted performance of a sample of SRI and conventional funds, ranked in light of the SFDR, during the COVID‐19 pandemic and the Russia–Ukraine war. Using a two‐step analysis, the results of the study show that funds with clear sustainability objectives, as defined by Article 9 of the SFDR, were able to outperform conventional funds, but only a few months after the onset of the crisis periods, thus demonstrating poor performance persistence. At the same time, sustainable funds with a focus on financial materiality, as defined by Article 8, were never able to generate significantly different risk‐adjusted performance from conventional funds. Our results show that the lack of performance persistence of Article 9 funds prevents an effective hedging role for investment strategies that consider extra‐financial criteria. They also confirm that the classification criteria introduced by the SFDR still need to be more specific and create more transparency in financial markets.
This chapter provides a comprehensive examination of the existing empirical literature on socially responsible investments (SRI) compared to traditional investments. More precisely, it focuses on analysing various studies that have explored the performance of SRI mutual funds and portfolios in comparison to non-SRI investments. The authors also discuss the different theories that support the possible outcomes of these studies. Our research indicates that SRI do not result in worse returns and seem to perform similarly to standard assets, but with less volatility, particularly during times of crisis. However, there are methodological issues in estimating the full financial and non-financial performance of SRI, leaving the question of whether SRI strategies outperform traditional investment strategies still unanswered. The authors suggest that future research should aim to assess the overall value of SRI, not just its financial returns, by developing new measures that consider both the economic and social value of SRI.
Purpose
This study aims to provide a precise understanding of how corporate sustainability information is used in socially responsible investing (SRI). The study is motivated by the lack of a recognised body of knowledge on this issue. This study, therefore, collates and reviews relevant studies (67 studies) to provide guidance to investors interested in SRI and identify a research agenda for academics desiring to contribute to this area.
Design/methodology/approach
This study conducts a systemic literature review employing recognised key words and searching the Web of Science. HistCite is utilised to ensure important cited studies are not missed from the collection. The review was conducted from two perspectives: (1) sources of sustainability information and (2) how the information is used in SRI.
Findings
The review identifies five major sources of sustainability information, including corporate reports, ESG ratings, industry affiliation, news and private communication with firms. These sources of information play different roles in the cross section of SRI strategies (i.e. negative and positive screening, active ownership and integration). This study provides guidance on how to use this information in SRI and provides recommendations for future research on how analysts interact with the information, how different informational characteristics impact implementation, ways to improve data quality, improvements to analysis methods and where data use needs to be extended into new strategies.
Originality/value
This review contributes to the SRI literature by inventorying studies of an important, yet omitted aspect, namely, sustainability information. This work also enriches the literature on corporate sustainability information by investigating how this information can be used for a specific purpose, namely, SRI. Given the increasing interest in SRI, this review will provide much-needed guidance for a range of practitioners, including investors and regulators.
The Sustainable Development Goals of the United Nation and interest by investors in Environmental, Social and Governance (ESG) investment strategies have caused a rapid shift to the green or renewable energy sector, from traditional or gray (oil, gas, and coal) energy companies. In this study, we examine whether and to what extent, financially speaking, there is a price to pay for investing in renewable energy sector equity. Moreover, we seek to determine whether green investments can be considered a hedge during times of financial stress. We find that alphas from investments in a portfolio of gray (overall energy sector) stocks and versus a portfolio of renewable energy equities during an exogenous, non‐financial shock—the COVID‐19 pandemic—and during non‐crisis periods did not differ statistically. However, the renewable energy index showed higher idiosyncratic volatility than the energy index, as expected. The results are robust to alternative model specifications. From a practical perspective, our results are informative in that they provide insights into the tradeoffs associated with renewable energy investments. In particular, risk‐adjusted returns to a renewable energy portfolio may be affected by greater idiosyncratic risk.
Purpose
Increasing focus on socially responsible investments (SRIs) and green projects in recent times, coupled with the arrival of COVID pandemic, are the main drivers of this study. The authors conduct a post-factum analysis of investor choice between sin and green investments before and through the COVID outbreak.
Design/methodology/approach
A passive investor is introduced who seeks maximum risk-adjusted return and/or investment variance. When presented an opportunity to add sin and/or green investments to her initial one-asset market-only investment position, she views and handles this issue as a portfolio problem (MPT). She estimates value-at-risk (VaR) and conditional-value-at-risk (CVaR) for portfolios to account for downside risk.
Findings
Green investments offer better overall risk-return optimization in spite of major inter-period differences in return-risk dynamics and substantial downside risk. Portfolios optimized for minimum variance perform just as well as the ones optimized for minimum downside risk. Return and risk have settled at higher levels since the onset of COVID, resulting in shifting the efficient frontier towards north-east in the return-risk space.
Originality/value
The study contributes to the literature in two ways: One, it examines investor choice between sin and green investments during a global health emergency and views this choice against the one made during normal times. Two, instead of using the principles of modern portfolio theory (MPT) explicitly for diversification, the study uses them to identify investor preference for one over the other investment type. This has not been widely done thus far.
Purpose
The purpose of this study is to evaluate the performance of mutual funds during the COVID-19 pandemic with environmental, social and governance (ESG) criteria. The main research question is whether mutual fund performance differs with respect to the level of the mutual fund’s ESG score.
Design/methodology/approach
The data set contains global fund data, and mutual fund performance is analyzed using two types of data envelopment analysis (DEA) models: the DEA portfolio index (DPEI) and the range direction measure (RDM) DEA. Propensity score matching and logistic regression are also applied.
Findings
The results reveal that: nonequity mutual funds present significantly higher performance compared to the performance of equity mutual funds; mutual funds with high ESG scores are associated with significantly higher performance compared to those with low to medium ESG scores; funds with high ESG scores experience higher performance irrespective of their type; and efficiency scores derived from the RDM DEA are significantly higher than those derived from the DPEI model.
Research limitations/implications
Investors, fund managers and market participants can benefit from the findings of this study and improve their investment decision-making process, including more sustainable funds in their portfolios. Regulators and policymakers should further promote or even require the inclusion of more sustainable investments in the financial products offered by institutional investors. The main limitation of the study is related to data availability regarding the ESG score of mutual funds.
Originality/value
To the best of the authors’ knowledge, this is the first study that provides robust evidence in support of a positive association between ESG scores and mutual fund performance during the pandemic-induced crisis applying a DEA methodology.
This paper explores market efficiency in the Ukrainian stock market to determine whether there are differences between traditional and ESG indices. Different data properties related to market efficiency are explored: persistence (R/S analysis is used for these purposes), stationarity (ADF tests), normality (Kolmogorov-Smirnoff, Anderson-Darling test, etc.), resistance to market anomalies (Day of the week effect, abnormal returns and patterns they generate are tested using parametrical and non-parametrical statistical tests), etc. Database includes daily data from 2 conventional Ukrainian stock market indices (UX and PFTS) and ESG index (WIG Ukraine) over the period 2015–2022. The following hypothesis is tested in this paper: ESG indices are more efficient than traditional ones. The findings suggest that there are no significant differences between traditional and ESG indices: they have the same persistence, stationarity, do not fit normal distribution and are not influenced by explored market anomalies. So, despite the fact that companies listed in the ESG index are more transparent and thus characterized by lower information asymmetry, they are more liquid and popular among investors, ESG index is not more efficient than traditional ones. This might be the result of unfair practices called “washing” aimed at signaling the active ESG involvement with actual absence of it. This means that many ESG companies are actually traditional. To prevent such practices, the ESG reporting regulation needs to be revised. AcknowledgmentAlex Plastun gratefully acknowledges financial support from the Ministry of Education and Science of Ukraine (0121U100473).
This paper conducts a systematic literature review of primary studies that analyze the relative performance of SRI Equity investment funds vs their conventional counterparts. The existing literature is analyzed and categorized into two samples depending on the benchmark used. Based on our research of the period between 1992 to July 2021 we arrive at a total sample of 54 papers. We can conclude that the vast majority (67%) of the empirical studies show no difference or a not statistically significant difference in the relative financial performance of SRI funds. We analyze trends in the literature and suggested “best practices” (sample size, period of the analysis, and use of multifactor measures). For the studies that use conventional funds as a benchmark, we analyze the use of the matched pair and the number of matching criteria. For studies that use an index as a benchmark, we observe differences between studies that use conventional indices, SRI indices, or both. The results suggest that performance may not be the key issue. We conclude with a debate on critical issues: the need for clearer definitions, disclosures, and standards, the relevance of the screening process of SRI funds, and the specific characteristics of SRI funds.
İlk kez Çin'in Wuhan şehrinde ortaya çıkan COVID-19 ani ve hızlı bir şekilde yayılmıştır. COVID-19'un pandemi olarak ilan edilmesi dünya çapında hem sağlık hem de ekonomi açısından belirsizliğe yol açmıştır. Bu belirsizlik özellikle borsalara olumsuz yönde yansımıştır. Çalışmanın amacı, COVID-19 pandemisinin Borsa İstanbul sürdürülebilirlik endeksi üzerindeki etkisini incelemektir. Bu amaç doğrultusunda olay çalışması yöntemi kullanılarak Türkiye'de ilk vakanın onaylandığı ve ilk ölümün onaylandığı tarihler olay günleri olarak seçilmiştir. Çalışmada her iki olay günündeki anormal getiriler ve kümülatif anormal getiriler belirlenerek değerlendirilmiştir. Çalışmanın bulgularına göre, olay günlerinde negatif anormal getiriler gözlemlenmiştir. Ancak ilk vakanın onaylandığı tarihteki anormal getiriler anlamlı değildir. Bu sonuç, ilk vaka açıklandığında sürdürülebilirlik endeksinin tepkisinin geciktiğini göstermektedir. Sürdürülebilirlik endeksinin negatif getirilerine rağmen, onaylanmış ilk vakanın olay pencerelerinde anlamlı pozitif kümülatif anormal getiriler meydana gelmiştir. Ancak, ilk ölümün açıklanmasından sonra, kümülatif getirinin piyasaya göre negatif yönde farklılaştığı belirlenmiştir. Sürdürülebilirlik endeksi ilk ölümün açıklanmasından sonra olumsuz yönde bir duyarlılık göstermiştir. Sonuçlar, her iki olay gününün sürdürülebilirlik endeksi üzerindeki kısa vadeli etkilerinin farklı olabileceğini göstermektedir.
Sustainability in business and ESG (environmental, social, and governance) in finance have exploded in popularity among researchers and practitioners. We surveyed 1,141 primary peer-reviewed papers and 27 meta-reviews (based on ∼1,400 underlying studies) published between 2015 and 2020. Aggregate conclusions from a sample suggest that the financial performance of ESG investing has on average been indistinguishable from conventional investing (with one in three studies indicating superior performance) – in contrast with research in the wider management literature as well as industry reports. Until recently top finance journals did not publish climate change related studies, yet these studies capture the frontier of corporate risk and ESG investment strategies. We developed three propositions: first, ESG integration as a strategy seems to perform better than screening or divestment; second, ESG investing provides asymmetric benefits, especially during a social or economic crisis; and third, decarbonization strategies can potentially capture a climate risk premium.
The literature has mainly relied on an annual and short span of data to analyze the relationship between energy, environmental and financial indicators. This study analyzes the relationship between energy efficiency, energy research, pollution mitigation, and FinTech by applying two novel methods-the causality test in the frequency domain [11] and the causality test in the time domain (Shi et al., 2018; 2020)- on the daily data from June 17, 2016 to November 16, 2021. Empirical results from the frequency domain test report that pollution mitigation temporarily causes energy efficiency only in the short run while energy efficiency Granger causes it in the short, medium, and long run. Furthermore, energy efficiency can predict FinTech in the short, medium, and long-run; on the other way, FinTech Granger causes energy efficiency in the long and medium run, suggesting a permanent causality relationship. Empirical results from the time-varying test show a bidirectional relationship between energy efficiency, and environmental and financial variables, especially with very high significant episodes around the recent pandemic collapse. Policymakers should promote the launch of financial technologies that will provide finance through green bonds for energy efficiency improvements as well as energy efficiency improvements for pollution mitigation. Further policy implications are discussed in the study.
Mitigating climate change effects requires investors (and their proxies, fund managers) to shift their business‐as‐usual strategies. This article analyzes Environmental, Social, and Governance (ESG) investing behavior through more than 13,000 messages exchanged by finance professionals from 2017 to 2020. There is a consensus that low and high ESG firms' discrimination is a necessary but not sufficient condition for ESG investing. Moreover, it is one thing for fund managers to claim that they are integrating ESG factors in their portfolios and another to do it properly. The restriction of the strategy space, internal and external transaction costs, and data quality are still viewed as overwhelming obstacles for seamlessly integrating ESG into financial portfolios. Sentiment analysis indicates that asset managers hold a negative view of ESG investing, surprising as ethical investing is becoming increasingly common. Unlocking the potential positive externalities from ESG investing may require regulators and investors' actions to improve the quality of information disclosure and pressure fund managers into incorporating nonfinancial criteria in their investment models.
Purpose
This study aims to analyse whether investment in green and sustainable stocks provide some cushion during current precarious time. To compare the impact of COVID-19 on the volatility of sustainable and market-capitalisation-based stocks, daily returns from Greenex, Carbonex, Large-Cap, Mid-Cap and Small-Cap index have been analysed over a period of six years from 2015 to 2021.
Design/methodology/approach
At the outset, logarithmic return of all selected indices has been tested for possible unit root and heteroscedastic. On confirmation of stationarity and heteroscedasticity of data, auto-regressive conditional heteroscedastic models have been applied. Thereafter, volatility is modelled through best suitable model as suggested by Akaike and Schwarz information criterions.
Findings
The findings indicate the positive impact of COVID-19 on the volatility of the indices. Asymmetric power ARCH model indicates highest significant impact of COVID-19 over the volatility of Large-Cap index, whereas exponential GARCH model detected highest significant impact of COVID-19 over the volatility of Mid-Cap Index.
Originality/value
To the best of the authors’ knowledge, the present study is original in the sense that it aimed at comparing the possible impact of COVID-19 over sustainable and market-capitalisation-based indices.
The literature lacks enough evidence on the nexus of green finance and clean energy although the terms ‘green’ and ‘clean’ have been eminent concepts in sustainable development. Therefore, the fundamental objective of this study is to carry out the causal relationship among green finance, clean energy, environmental responsibility, and green technology by applying the novel time-varying causality test (Shi et al., 2018, 2020) on the daily data spanning from July 31, 2014, to October 12, 2021. The data follow persistent upward and downward movements; thus, the application of a time-varying approach should be reliable and robust. The recursive evolving and rolling window algorithms show bidirectional causalities among green finance, clean energy, environmental responsibility, and green technology, but not for the entire period, and with a special decrease and loss of significance in the COVID-19 period. In addition, clean energy caused by green finance is less evident, except in specific periods, especially at the start of the pandemic. However, higher volatility and significance of causality are observed for the entire period running from clean energy to green finance. Thus, green finance investments are promoted and proportionated by the need for clean energy. This study exhibits the need to design a comprehensive policy for strengthening environmental responsibility and green finance through the funding of green technology to successful energy transition and sustainable development goals.