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Environmental, social, and governance (ESG) investing and commodities: dynamic connectedness and risk management strategies

Author

Listed:
  • Efe C. Caglar Cagli
  • Pinar Evrim Mandaci
  • Dilvin Taşkın

Abstract

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.

Suggested Citation

  • Efe C. Caglar Cagli & Pinar Evrim Mandaci & Dilvin Taşkın, 2022. "Environmental, social, and governance (ESG) investing and commodities: dynamic connectedness and risk management strategies," Sustainability Accounting, Management and Policy Journal, Emerald Group Publishing Limited, vol. 14(5), pages 1052-1074, October.
    • Handle: RePEc:eme:sampjp:sampj-01-2022-0014
    DOI: 10.1108/SAMPJ-01-2022-0014
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    Citations

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    Cited by:

    1. Arfaoui, Nadia & Naeem, Muhammad Abubakr & Maherzi, Teja & Kayani, Umar Nawaz, 2024. "Can green investment funds hedge climate risk?," Finance Research Letters, Elsevier, vol. 60(C).
    2. Wan, Jieru & Yin, Libo & Wu, You, 2024. "Return and volatility connectedness across global ESG stock indexes: Evidence from the time-frequency domain analysis," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 397-428.
    3. Cagli, Efe Caglar, 2023. "The volatility spillover between battery metals and future mobility stocks: Evidence from the time-varying frequency connectedness approach," Resources Policy, Elsevier, vol. 86(PA).

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