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Mitigating Contagion Risk by ESG Investing

Author

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  • Roy Cerqueti

    (Department of Social and Economic Sciences, Sapienza University of Rome, 00185 Rome, Italy
    School of Business, London South Bank University, London SE1 0AA, UK
    Angevin Research Group in Economics and Management, University of Angers, CEDEX 01, 49036 Angers, France)

  • Rocco Ciciretti

    (Department of Economics and Finance, Tor Vergata University of Rome, 00133 Rome, Italy)

  • Ambrogio Dalò

    (Faculty of Economics and Business, University of Groningen, 9747 AE Groningen, The Netherlands)

  • Marco Nicolosi

    (Department of Economics, University of Perugia, 06123 Perugia, Italy)

Abstract

We study whether ESG investing may mitigate the risk of contagion among equity mutual funds. More precisely, we measure the impact of fire-sale spillover, propagating throughout the financial system, on funds ranked on ESG aspects. We compare the relative loss of capitalization experienced by high- and low-ranked funds. Contagion, which is indirect since funds are not exposed to counterparty risk, is modeled using a network structure. In cases of deleveraging from funds, fire-sale spillover propagates throughout the network because of common asset holdings among funds. We find that funds’ vulnerability to contagion decreases when the level of ESG compliance increases. Moreover, the average relative loss is lower for the high-ranked funds than for the low-ranked ones. The small-size funds mainly drive the result. Our findings indicate that contagion is less effective for high-ranked funds. From a macroeconomic perspective, ESG investing represents a new opportunity for diversification that makes the system more resilient to contagion.

Suggested Citation

  • Roy Cerqueti & Rocco Ciciretti & Ambrogio Dalò & Marco Nicolosi, 2022. "Mitigating Contagion Risk by ESG Investing," Sustainability, MDPI, vol. 14(7), pages 1-13, March.
    • Handle: RePEc:gam:jsusta:v:14:y:2022:i:7:p:3805-:d:777967
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    1. Iulia Lupu & Gheorghe Hurduzeu & Radu Lupu, 2022. "How Is the ESG Reflected in European Financial Stability?," Sustainability, MDPI, vol. 14(16), pages 1-14, August.

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