IDEAS home Printed from https://ideas.repec.org/a/spr/decfin/v44y2021i2d10.1007_s10203-021-00351-w.html
   My bibliography  Save this article

Responsible investments reduce market risks

Author

Listed:
  • Giacomo Morelli

    (Sapienza University of Rome)

  • Rita D’Ecclesia

    (Sapienza University of Rome)

Abstract

Responsible investments are considered one of the driving factors of revenues growth enhancing risk-adjusted returns. This paper investigates the effects of responsible investments on the volatility of European stock returns. First, we exploit an expectation–maximization (E–M) algorithm to cluster the companies into two groups according to the Environmental score (E), used as a proxy for responsible investments. Second, we build one global minimum variance (GMV) portfolio within each group and estimate its volatility using ARCH-type models. Finally, we forecast well-known risk measures such as the value-at-risk (VaR) and the expected tail loss (ETL) to assess market risks for investing green. Responsible portfolios composed of stocks with high E score outperform their Low E counterparts and are shown to be safer choices to mitigate risks, especially during periods of market distress. The results are remarkable for many sectors.

Suggested Citation

  • Giacomo Morelli & Rita D’Ecclesia, 2021. "Responsible investments reduce market risks," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(2), pages 1211-1233, December.
    • Handle: RePEc:spr:decfin:v:44:y:2021:i:2:d:10.1007_s10203-021-00351-w
    DOI: 10.1007/s10203-021-00351-w
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10203-021-00351-w
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10203-021-00351-w?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Petitjean, Mikael, 2019. "Eco-friendly policies and financial performance: Was the financial crisis a game changer for large US companies?," Energy Economics, Elsevier, vol. 80(C), pages 502-511.
    2. Shameek Konar & Mark A. Cohen, 2001. "Does The Market Value Environmental Performance?," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 281-289, May.
    3. Darren D. Lee & Jacquelyn E. Humphrey & Karen L. Benson & Jason Y. K. Ahn, 2010. "Socially responsible investment fund performance: the impact of screening intensity," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 50(2), pages 351-370, June.
    4. 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.
    5. Gunther Capelle-Blancard & Stéphanie Monjon, 2011. "The Performance of Socially Responsible Funds: Does the Screening Process Matter?," Working Papers 2011-12, CEPII research center.
    6. Joliet, Robert & Titova, Yulia, 2018. "Equity SRI funds vacillate between ethics and money: An analysis of the funds’ stock holding decisions," Journal of Banking & Finance, Elsevier, vol. 97(C), pages 70-86.
    7. Capelle-Blancard, Gunther & Crifo, Patricia & Diaye, Marc-Arthur & Oueghlissi, Rim & Scholtens, Bert, 2019. "Sovereign bond yield spreads and sustainability: An empirical analysis of OECD countries," Journal of Banking & Finance, Elsevier, vol. 98(C), pages 156-169.
    8. Ferrell, Allen & Liang, Hao & Renneboog, Luc, 2016. "Socially responsible firms," Journal of Financial Economics, Elsevier, vol. 122(3), pages 585-606.
    9. Bharat Kumar Meher & Iqbal Thonse Hawaldar & Latasha Mohapatra & Cristi Spulbar & Ramona Birau, 2020. "The Effects of Environment, Society and Governance Scores on Investment Returns and Stock Market Volatility," International Journal of Energy Economics and Policy, Econjournals, vol. 10(4), pages 234-239.
    10. Erragragui, Elias & Lagoarde-Segot, Thomas, 2016. "Solving the SRI puzzle? A note on the mainstreaming of ethical investment," Finance Research Letters, Elsevier, vol. 18(C), pages 32-42.
    11. Banerjee, Rajabrata & Gupta, Kartick, 2017. "The effects of environmental sustainability and R&D on corporate risk-taking: International evidence," Energy Economics, Elsevier, vol. 65(C), pages 1-15.
    12. Robert F. Engle & Eric Ghysels & Bumjean Sohn, 2013. "Stock Market Volatility and Macroeconomic Fundamentals," The Review of Economics and Statistics, MIT Press, vol. 95(3), pages 776-797, July.
    13. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. "On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
    14. Engle, Robert F & Ng, Victor K, 1993. "Measuring and Testing the Impact of News on Volatility," Journal of Finance, American Finance Association, vol. 48(5), pages 1749-1778, December.
    15. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    16. Hachenberg, B. & Schiereck, D., 2018. "Are green bonds priced differently from conventional bonds?," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 109709, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    17. Asger Lunde & Peter R. Hansen, 2005. "A forecast comparison of volatility models: does anything beat a GARCH(1,1)?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(7), pages 873-889.
    18. Jacquelyn Humphrey & Darren Lee, 2011. "Australian Socially Responsible Funds: Performance, Risk and Screening Intensity," Journal of Business Ethics, Springer, vol. 102(4), pages 519-535, September.
    19. Karl V. Lins & Henri Servaes & Ane Tamayo, 2017. "Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility during the Financial Crisis," Journal of Finance, American Finance Association, vol. 72(4), pages 1785-1824, August.
    20. Finjord, Fredrik & Hagspiel, Verena & Lavrutich, Maria & Tangen, Marius, 2018. "The impact of Norwegian-Swedish green certificate scheme on investment behavior: A wind energy case study," Energy Policy, Elsevier, vol. 123(C), pages 373-389.
    21. Ferrell, A. & Liang, Hao & Renneboog, Luc, 2016. "Socially responsible firms," Other publications TiSEM 07e115ac-fdcb-4c4b-a0b8-a, Tilburg University, School of Economics and Management.
    22. Dyck, Alexander & Lins, Karl V. & Roth, Lukas & Wagner, Hannes F., 2019. "Do institutional investors drive corporate social responsibility? International evidence," Journal of Financial Economics, Elsevier, vol. 131(3), pages 693-714.
    23. Olivier David Zerbib, 2019. "The effect of pro-environmental preferences on bond prices: Evidence from green bonds," Post-Print halshs-02008641, HAL.
    24. Robert F. Engle & Jose Gonzalo Rangel, 2008. "The Spline-GARCH Model for Low-Frequency Volatility and Its Global Macroeconomic Causes," Review of Financial Studies, Society for Financial Studies, vol. 21(3), pages 1187-1222, May.
    25. Zerbib, Olivier David, 2019. "The effect of pro-environmental preferences on bond prices: Evidence from green bonds," Journal of Banking & Finance, Elsevier, vol. 98(C), pages 39-60.
    26. Stellner, Christoph & Klein, Christian & Zwergel, Bernhard, 2015. "Corporate social responsibility and Eurozone corporate bonds: The moderating role of country sustainability," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 538-549.
    27. Halbritter, Gerhard & Dorfleitner, Gregor, 2015. "The wages of social responsibility — where are they? A critical review of ESG investing," Review of Financial Economics, Elsevier, vol. 26(C), pages 25-35.
    28. repec:dau:papers:123456789/7347 is not listed on IDEAS
    29. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    30. Natalia Semenova & Lars G. Hassel, 2008. "Financial outcomes of environmental risk and opportunity for US companies," Sustainable Development, John Wiley & Sons, Ltd., vol. 16(3), pages 195-212.
    31. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-350, July.
    32. Kempf, Alexander & Osthoff, Peer, 2007. "The effect of socially responsible investing on portfolio performance," CFR Working Papers 06-10, University of Cologne, Centre for Financial Research (CFR).
    33. Nofsinger, John & Varma, Abhishek, 2014. "Socially responsible funds and market crises," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 180-193.
    34. Gunther Capelle†Blancard & Stéphanie Monjon, 2014. "The Performance of Socially Responsible Funds: Does the Screening Process Matter?," European Financial Management, European Financial Management Association, vol. 20(3), pages 494-520, June.
    35. Hao Liang & Luc Renneboog, 2017. "On the Foundations of Corporate Social Responsibility," Journal of Finance, American Finance Association, vol. 72(2), pages 853-910, April.
    36. Alexander Kempf & Peer Osthoff, 2007. "The Effect of Socially Responsible Investing on Portfolio Performance," European Financial Management, European Financial Management Association, vol. 13(5), pages 908-922, November.
    37. Cornett, Marcia Millon & Erhemjamts, Otgontsetseg & Tehranian, Hassan, 2016. "Greed or good deeds: An examination of the relation between corporate social responsibility and the financial performance of U.S. commercial banks around the financial crisis," Journal of Banking & Finance, Elsevier, vol. 70(C), pages 137-159.
    38. Britta Hachenberg & Dirk Schiereck, 2018. "Are green bonds priced differently from conventional bonds?," Journal of Asset Management, Palgrave Macmillan, vol. 19(6), pages 371-383, October.
    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. Gillan, Stuart L. & Koch, Andrew & Starks, Laura T., 2021. "Firms and social responsibility: A review of ESG and CSR research in corporate finance," Journal of Corporate Finance, Elsevier, vol. 66(C).
    2. Ramelli, Stefano & Ossola, Elisa & Rancan, Michela, 2021. "Stock price effects of climate activism: Evidence from the first Global Climate Strike," Journal of Corporate Finance, Elsevier, vol. 69(C).
    3. Gao, Ya & Xiong, Xiong & Feng, Xu, 2020. "Responsible investment in the Chinese stock market," Research in International Business and Finance, Elsevier, vol. 52(C).
    4. Valeria D’Amato & Rita D’Ecclesia & Susanna Levantesi, 2021. "Fundamental ratios as predictors of ESG scores: a machine learning approach," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(2), pages 1087-1110, December.
    5. José Luis Miralles-Quirós & María Mar Miralles-Quirós & José Manuel Nogueira, 2020. "Sustainable Development Goals and Investment Strategies: The Profitability of Using Five-Factor Fama-French Alphas," Sustainability, MDPI, vol. 12(5), pages 1-16, February.
    6. Al Ayoubi, Khalil & Enjolras, Geoffroy, 2022. "Does disinvestment from fossil fuels reduce the financial performance of responsible sovereign wealth funds?," Journal of Multinational Financial Management, Elsevier, vol. 64(C).
    7. Valeria D’Amato & Rita D’Ecclesia & Susanna Levantesi, 2022. "ESG score prediction through random forest algorithm," Computational Management Science, Springer, vol. 19(2), pages 347-373, June.
    8. Joliet, Robert & Titova, Yulia, 2018. "Equity SRI funds vacillate between ethics and money: An analysis of the funds’ stock holding decisions," Journal of Banking & Finance, Elsevier, vol. 97(C), pages 70-86.
    9. Kräussl, Roman & Oladiran, Tobi & Stefanova, Denitsa, 2023. "A review on ESG investing: Investors' expectations, beliefs and perceptions," CFS Working Paper Series 694, Center for Financial Studies (CFS).
    10. Amparo Soler‐Domínguez & Juan Carlos Matallín‐Sáez & Diego Víctor de Mingo‐López & Emili Tortosa‐Ausina, 2021. "Looking for sustainable development: Socially responsible mutual funds and the low‐carbon economy," Business Strategy and the Environment, Wiley Blackwell, vol. 30(4), pages 1751-1766, May.
    11. Vincenzo D'Apice & Giovanni Ferri & Mariantonietta Intonti, 2021. "Sustainable disclosure versus ESG intensity: Is there a cross effect between holding and SRI funds?," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 28(5), pages 1496-1510, September.
    12. Halit Gonenc & Bert Scholtens, 2019. "Responsibility and Performance Relationship in the Banking Industry," Sustainability, MDPI, vol. 11(12), pages 1-49, June.
    13. Tamas Barko & Martijn Cremers & Luc Renneboog, 2022. "Shareholder Engagement on Environmental, Social, and Governance Performance," Journal of Business Ethics, Springer, vol. 180(2), pages 777-812, October.
    14. Ved Dilip Beloskar & S. V. D. Nageswara Rao, 2023. "Did ESG Save the Day? Evidence From India During the COVID-19 Crisis," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 30(1), pages 73-107, March.
    15. Leite, Paulo & Cortez, Maria Céu, 2014. "Style and performance of international socially responsible funds in Europe," Research in International Business and Finance, Elsevier, vol. 30(C), pages 248-267.
    16. Hua Fan, John & Michalski, Lachlan, 2020. "Sustainable factor investing: Where doing well meets doing good," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 230-256.
    17. Po‐Hsuan Hsu & Kai Li & Chi‐Yang Tsou, 2023. "The Pollution Premium," Journal of Finance, American Finance Association, vol. 78(3), pages 1343-1392, June.
    18. Federica Ielasi & Paolo Ceccherini & Pietro Zito, 2020. "Integrating ESG Analysis into Smart Beta Strategies," Sustainability, MDPI, vol. 12(22), pages 1-22, November.
    19. Patrícia Pereira & Maria Céu Cortez & Florinda Silva, 2019. "Socially responsible investing and the performance of Eurozone corporate bond portfolios," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 26(6), pages 1407-1422, November.
    20. Gerasimos G. Rompotis, 2022. "The ESG ETFs in the UK," Journal of Asset Management, Palgrave Macmillan, vol. 23(2), pages 114-129, March.

    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:spr:decfin:v:44:y:2021:i:2:d:10.1007_s10203-021-00351-w. 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: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.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.