IDEAS home Printed from https://ideas.repec.org/a/spr/endesu/v25y2023i9d10.1007_s10668-022-02460-x.html
   My bibliography  Save this article

Clean energy and (E)SG investing from energy and environmental linkages

Author

Listed:
  • Takashi Kanamura

    (Kyoto University)

Abstract

The objectives of this study are to analyze the presence of environmental values in ESG indexes based on the positive value relationship between energy and the environment found in existing studies and to identify the characteristics of environmental, social, and governance (ESG) investments by examining the performance of ESG investments compared to market portfolios, as well as to consider the implications of ESG investment in clean energy policy based on the results of the empirical analysis of this study. This paper contributes threefold. First, using a supply and demand-based pricing model, we propose a new model of the expected return, risk, and performance ratio of the ESG premiums defined by the log price differences between ESG indexes and a market portfolio to analyze how ESG investments perform. Second, based on the empirical findings of this study that the correlation between ESG indexes and energy prices is a decreasing function of the latter in contrast to other environmental assets, this paper suggests that ESG indexes cannot adequately demonstrate environmental values but reflect social and governance values, i.e., (E)SG, in the complementary perspective. Third, using the empirical findings of this study that the information ratio of the ESG premium tends to be positive but declines and approaches zero over time, this paper indicates that although ESG investments can be significant compared to market index investments, the significance is limited because ESG investment performance converges with market portfolio performance. In conclusion, two points should be noted about ESG investing in clean energy policy: given the dilution of environmental values in ESG investing, a clear distinction should be made between ESG investing and renewable energy investing; even if investments in renewable energy projects are treated as ESG investments, reflecting current market trends, we should be prepared for the fact that the superior investment performance due to social and governance values, rather than environmental values, will not last long.

Suggested Citation

  • Takashi Kanamura, 2023. "Clean energy and (E)SG investing from energy and environmental linkages," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 25(9), pages 9779-9819, September.
    • Handle: RePEc:spr:endesu:v:25:y:2023:i:9:d:10.1007_s10668-022-02460-x
    DOI: 10.1007/s10668-022-02460-x
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10668-022-02460-x
    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/s10668-022-02460-x?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. Gupta, Kartick, 2017. "Do economic and societal factors influence the financial performance of alternative energy firms?," Energy Economics, Elsevier, vol. 65(C), pages 172-182.
    2. Matthew W. Sherwood & Julia L. Pollard, 2018. "The risk-adjusted return potential of integrating ESG strategies into emerging market equities," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 8(1), pages 26-44, January.
    3. 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.
    4. Konstantina Kappou & Ioannis Oikonomou, 2016. "Is There a Gold Social Seal? The Financial Effects of Additions to and Deletions from Social Stock Indices," Journal of Business Ethics, Springer, vol. 133(3), pages 533-552, February.
    5. Takashi Kanamura, 2022. "A model of price correlations between clean energy indices and energy commodities," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 12(2), pages 319-359, April.
    6. N. C. Ashwin Kumar & Camille Smith & Leïla Badis & Nan Wang & Paz Ambrosy & Rodrigo Tavares, 2016. "ESG factors and risk-adjusted performance: a new quantitative model," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 6(4), pages 292-300, October.
    7. Kanamura, Takashi, 2016. "Role of carbon swap trading and energy prices in price correlations and volatilities between carbon markets," Energy Economics, Elsevier, vol. 54(C), pages 204-212.
    8. Benjamin R. Auer, 2016. "Do Socially Responsible Investment Policies Add or Destroy European Stock Portfolio Value?," Journal of Business Ethics, Springer, vol. 135(2), pages 381-397, May.
    9. Broadstock, David C. & Chan, Kalok & Cheng, Louis T.W. & Wang, Xiaowei, 2021. "The role of ESG performance during times of financial crisis: Evidence from COVID-19 in China," Finance Research Letters, Elsevier, vol. 38(C).
    10. Pedersen, Lasse Heje & Fitzgibbons, Shaun & Pomorski, Lukasz, 2021. "Responsible investing: The ESG-efficient frontier," Journal of Financial Economics, Elsevier, vol. 142(2), pages 572-597.
    11. Kanamura, Takashi, 2020. "Are green bonds environmentally friendly and good performing assets?," Energy Economics, Elsevier, vol. 88(C).
    12. Henriques, Irene & Sadorsky, Perry, 2010. "Can environmental sustainability be used to manage energy price risk?," Energy Economics, Elsevier, vol. 32(5), pages 1131-1138, September.
    13. 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.
    14. Auer, Benjamin R. & Schuhmacher, Frank, 2016. "Do socially (ir)responsible investments pay? New evidence from international ESG data," The Quarterly Review of Economics and Finance, Elsevier, vol. 59(C), pages 51-62.
    15. Joon Woo Park & Chang Won Lee, 2018. "Performance of stock price with changes in SRI governance index," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 25(6), pages 1121-1129, November.
    16. 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).
    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. Cortez, Maria Céu & Andrade, Nuno & Silva, Florinda, 2022. "The environmental and financial performance of green energy investments: European evidence," Ecological Economics, Elsevier, vol. 197(C).
    2. Guillermo Badía & Luis Ferruz & Maria Céu Cortez, 2021. "The performance of social responsible investing from retail investors' perspective: international evidence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 6074-6088, October.
    3. Costanza Torricelli & Beatrice Bertelli, 2022. "ESG screening strategies and portfolio performance: how do they fare in periods of financial distress?," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0087, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    4. Brzeszczyński, Janusz & Gajdka, Jerzy & Schabek, Tomasz, 2021. "How risky are the socially responsible investment (SRI) stocks? Evidence from the Central and Eastern European (CEE) companies," Finance Research Letters, Elsevier, vol. 42(C).
    5. 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.
    6. Liu, Xufeng & Wan, Die, 2023. "Retail investor trading and ESG pricing in China," Research in International Business and Finance, Elsevier, vol. 65(C).
    7. Guillermo Badía & Maria C. Cortez & Luis Ferruz, 2020. "Socially responsible investing worldwide: Do markets value corporate social responsibility?," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 27(6), pages 2751-2764, November.
    8. Irene Aldridge & Payton Martin, 2022. "ESG In Corporate Filings: An AI Perspective," Papers 2212.00018, arXiv.org.
    9. Luluk Widyawati, 2020. "A systematic literature review of socially responsible investment and environmental social governance metrics," Business Strategy and the Environment, Wiley Blackwell, vol. 29(2), pages 619-637, February.
    10. Gregor Dorfleitner & Christian Kreuzer & Christian Sparrer, 2020. "ESG controversies and controversial ESG: about silent saints and small sinners," Journal of Asset Management, Palgrave Macmillan, vol. 21(5), pages 393-412, September.
    11. Gardenier, Julius & Lac, Visieu & Ashfaq, Muhammad, 2021. "Risk-adjusted return in sustainable finance: A comparative analysis of European positively screened and best-in-class ESG investment portfolios and the Euro Stoxx 50 index using the Sharpe Ratio," IU Discussion Papers - Business & Management 7/2021, IU International University of Applied Sciences.
    12. Ciciretti, Rocco & Dalò, Ambrogio & Dam, Lammertjan, 2023. "The contributions of betas versus characteristics to the ESG premium," Journal of Empirical Finance, Elsevier, vol. 71(C), pages 104-124.
    13. Muneer Shaik & Mohd Ziaur Rehman, 2023. "The Dynamic Volatility Connectedness of Major Environmental, Social, and Governance (ESG) Stock Indices: Evidence Based on DCC-GARCH Model," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 30(1), pages 231-246, March.
    14. Lööf, Hans & Sahamkhadam, Maziar & Stephan, Andreas, 2022. "Is Corporate Social Responsibility investing a free lunch? The relationship between ESG, tail risk, and upside potential of stocks before and during the COVID-19 crisis," Finance Research Letters, Elsevier, vol. 46(PB).
    15. Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2021. "Sustainable investing in equilibrium," Journal of Financial Economics, Elsevier, vol. 142(2), pages 550-571.
    16. Monica Billio & Michele Costola & Iva Hristova & Carmelo Latino & Loriana Pelizzon, 2021. "Inside the ESG ratings: (Dis)agreement and performance," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 28(5), pages 1426-1445, September.
    17. 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.
    18. Jedynak Tomasz, 2017. "Is it Worth Being Good? – The Efficiency and Risk of Socially Responsible Investing in Light of Various Empirical Studies," Financial Internet Quarterly (formerly e-Finanse), Sciendo, vol. 13(3), pages 1-14, September.
    19. Guillermo Badía & Vicente Pina & Lourdes Torres, 2019. "Financial Performance of Government Bond Portfolios Based on Environmental, Social and Governance Criteria," Sustainability, MDPI, vol. 11(9), pages 1-13, April.
    20. Agliardi, Elettra & Alexopoulos, Thomas & Karvelas, Kleanthis, 2023. "The environmental pillar of ESG and financial performance: A portfolio analysis," Energy Economics, Elsevier, vol. 120(C).

    More about this item

    Keywords

    ESG index; Energy-environment linkage; ESG premium; Information ratio; Clean energy policy;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

    Statistics

    Access and download statistics

    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:endesu:v:25:y:2023:i:9:d:10.1007_s10668-022-02460-x. 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.