Sustainability Investment in Distress: Volatility Spillovers and ESG Markets Portfolio Implications

This study examines sustainability investments under stressful and constrained scenarios. The study exploits a wide range of indices, ranging from sustainability, ESG, to financial. The Diebold and Yilmaz framework and the DCC-GARCH were employed. The analysis covered 2382 observations with results capturing aggregate cross-market connectedness. The total volatility index, 76.95% based on static analysis, indicates the markets are highly integrated. The predominant net volatility transmitters are the SPX, TSX, EURUSA, and S&P500, while ESG50, ESG30, CAC, and Midi are net volatility receivers. The dynamics significantly vary, reaffirming the fact that the ESG50 and ESG30 are shock absorbers with an inverse behavioral pattern seen in the S&P500. Meaningful results based on the modern portfolio theory weights and DCC-GARCH hedge ratios based on the index pairs provide substantial diversification opportunities with hedge ratios ranging from 0.23 to 0.90. Robustness checks based on sensitivity checks with respect to varying rolling windows and lag specifications confirm the stability and validity of the findings. These empirical results are relevant for the establishment of sustainable portfolio construction and portfolio risk management in the global markets.