Does ESG Index Have Strong Conditional Correlations with Sustainability Related Stock Indices?

This study employs the asymmetric dynamic conditional correlation (A-DCC) model developed by Cappiello et al. (2006) to empirically evaluate the conditional correlations between the MSCI World ESG Leaders Index (Environmental, Social, and Governance: ESG) and WilderHill New Energy Global Innovation Index (NEX: renewable energy stock), the S&P Green Bond Index Total Return (Green Bond index), and the Dow Jones Sustainability World Composite Index (Sustainability Index). The main findings can be summarized as follows: First, the pair of ESG Index and Sustainability Index exhibits a relatively stable trend with high levels of correlations. Second, the DCC for the pairs of ESG Index and Green Bond decreased significantly around 2014, which indicates that the decrease in crude oil prices weakened the correlation between ESG Index and Green Bond. Moreover, around 2020, the dynamic conditional correlation between ESG Index and the other three indices fluctuates significantly, which indicates that the impact of the 2020 COVID-19 pandemic is profound. Third, by employing the AR model to estimate the dynamic conditional correlation with dummy variables, we further demonstrate the influences from the crises to the DCC between variables. Environment, Social, and Governance (ESG)ESG is a set of principles that socially responsible investors use to screen prospective investments for business operations. Environmental standards understand how a corporation works as a steward of nature. Social criteria analyze how a corporation handles relationships with workers, vendors, clients, and the societies in which it works. In recent years, ESG has become an increasingly common way for investors to determine the companies they may like to invest in. Additionally, several mutual funds, investment companies, and robo-advisors are now selling products that use the ESG criterion. This can also help investors avoid businesses that, because of their environmental or other policies, may pose a higher financial risk. In fact, the indices of corporate social responsibility (CSR) and socially responsible investment (SRI) are similar to ESG. CSRCSR is a form of self-regulating international private businesses aimed at contributing to the social objectives of a philanthropic, activist, or charitable nature by participating in or encouraging voluntary or ethically focused activities.