ESG Uncertainty and Predictability of Stock Returns and Volatility in South Africa: Evidence from a Higher-Order Nonparametric Causality-in-Quantiles Framework

This paper analyzes the predictive role of Environmental, Social, and Governance (ESG) uncertainty on stock returns and volatility in South Africa. In this regard, we first develop a Google Trends data-based ESG Uncertainty Index (ESGUI), derived from search volumes of 193 global and local terms related to ESG and uncertainty over the monthly period of January 2004 to April 2026. Thereafter, we use the k-th order nonparametric causality-in-quantiles test, which is robust to nonlinearity, to predict the conditional distributions of overall and 10 sectoral stock returns and volatility. We find that, while ESGUI causes stock returns (over a minimum of 3 conditional quantiles) in 8 out of the 11 indexes considered, there is strong evidence of predictability over the entire conditional distribution of volatility (squared stock returns) for both the overall and the sectoral stock indexes. Furthermore, our results are, in general, robust to an alternative measure of volatility, i.e., realized volatility, and for stock returns and volatility filtered through the inclusion of a wide array of domestic and global macroeconomic and financial variables. Our findings carry important implications for investors and policymakers.