Submitted Successfully!
To reward your contribution, here is a gift for you: A free trial for our video production service.
Thank you for your contribution! You can also upload a video entry or images related to this topic.
Version Summary Created by Modification Content Size Created at Operation
1
Giorgia Russo
 + 1245 word(s) 1245 2021-12-01 09:38:14 |
2 format correct
Nora Tang
 Meta information modification 1245 2021-12-16 09:22:07 |

Video Upload Options

We provide professional Video Production Services to translate complex research into visually appealing presentations. Would you like to try it?
No, upload directly Yes

Confirm

Are you sure to Delete?
Yes No
Cite
If you have any further questions, please contact Encyclopedia Editorial Office.
Russo, G. Sustainable Finance and COVID-19. Encyclopedia. Available online: https://encyclopedia.pub/entry/17188 (accessed on 26 December 2024).
Russo G. Sustainable Finance and COVID-19. Encyclopedia. Available at: https://encyclopedia.pub/entry/17188. Accessed December 26, 2024.
Russo, Giorgia. "Sustainable Finance and COVID-19" Encyclopedia, https://encyclopedia.pub/entry/17188 (accessed December 26, 2024).
Russo, G. (2021, December 16). Sustainable Finance and COVID-19. In Encyclopedia. https://encyclopedia.pub/entry/17188
Russo, Giorgia. "Sustainable Finance and COVID-19." Encyclopedia. Web. 16 December, 2021.
Sustainable Finance and COVID-19
Edit
This entry is adapted from the peer-reviewed paper 10.3390/su132313253

Both the GARCH models and the event study suggest that funds with a higher ESG rating were able to outperform other funds during the COVID-19 period. These funds had a greater level of resilience and exhibited a lower level of risk contagion during the pandemic. These instruments appear to assume the role of risk protection and should be considered a means of both promoting sustainable growth and minimizing portfolio risk.

ESG funds volatility analysis financial performance sustainable finance

1. Introduction

Since the end of 2019, humanity has faced problems caused by the SARS-CoV-2 virus. The health emergency caused by the COVID-19 pandemic very quickly turned into a global economic and financial crisis. In fact, to counteract the coronavirus outbreak, in many countries, people were required to stay in their homes and national governments imposed a state of alarm, which brought economic activity to a standstill. This led to the deepest economic recession of the modern era. As a result of this, the beginning of 2020 saw a severe financial market crash.
According to recent research, the spread of the virus and its consequences on people’s health could be the result of unsustainable development, which is a major cause of climate change and ecosystem alteration (e.g., [1][2][3]).
The coronavirus outbreak is creating both serious health problems and economic problems. These two problems are linked by the general and extended lockdown [4]. One of the first studies in this field (Coibion et al. [5] found that a large proportion of people reported a reduction in their income and level of consumption and a reduction in the employment rate. Research from the IMF [6] confirmed the same negative trend with regard to work hours and forecast a downturn in GDP in the main developed countries (G20). Aside from these results, Guerrieri et al. [7] demonstrated that the negative supply shock caused by the COVID-19 pandemic could lead to an even more severe negative demand shock. From another point of view, Bonaccorsi et al. [8] demonstrated a relationship between the lockdown and an increase in socio-economic inequality. Given that finance is closely related to the real economy, the rapid and extreme drop in market indexes and the dramatic increase in the VIX between 24 February and 27 March are no surprise. Looking at the returns of many stock market indexes, it is very easy to see the impact of this shock. For example, using an event study-based methodology, a previous study by Liu et al. [9] showed that the unexpected virus outbreak had a profound impact on many stock markets. Moreover, in terms of volatility, there were many negative consequences. In this regard, Meher et al. [10] reported higher volatility in all the markets that they considered in their analysis and this volatility increased as the number of cases of COVID-19 increased.
It is evident that there is the need to face two problems simultaneously: On one hand, it is necessary to revive the economy as quickly as possible, and, on the other, economic growth must be managed in a more sustainable way. One of the possible tools with which to approach this trade-off is responsible finance. Ethical and green finance could be used to achieve this aim because it considers financial returns alongside environmental, social, and governance (ESG) issues. More generally, sustainable finance could help to overcome the economic and environmental crisis because of its capacity to gather resources to promote investment and to foster economic growth with a low socio-environmental impact. To support this hypothesis, we recall the research of McWilliams and Siegel [11] who found that it is possible to maximize the value for the shareholder while adopting a corporate social responsibility policy.
For this reason, we would like to investigate the financial performance of ESG funds during the last economic downturn in greater depth. They could overcome the trade-offs but, as is well known, the results concerning their financial performance are mixed. On one hand, sustainable financial products have been shown to outperform the market during a crisis (e.g., [12][13], and more recently Broadstock et al. [14] and Engelhardt et al. [15]); by contrast, some results are negative or do not show any outperformance during a bear market (e.g., [16][17], and, with a specific focus on the last crisis, Folger-Laronde et al. [18], Demers et al. [19], and Chiappini et al. [20]) or without considering any financial crisis period (e.g., [21][22]).
Given this scenario, our research attempted to provide new insights concerning the conditional heteroskedasticity of ESG funds and their resilience during the COVID-19 pandemic with the aim of improving our knowledge of the performance (both in terms of returns and risk) of these tools and selecting more efficient portfolios.
We based our analysis on a sample of European ESG funds. This was because Europe was one of the areas most affected by the pandemic and because the financial markets in these countries had been less investigated than those in other areas, despite representing a large share of global GDP. We are aware that our sample is small, but this was the price that we had to pay in order to create a portfolio with homogenous funds. In fact, every item considered holds the MSCI Europe index as the benchmark. Given that the funds have the same benchmark, our results our more reliable. Moreover, we chose the MSCI Europe index because it adequately represents the financial markets of the main European countries and firms.

2. The Reaction of ESG Funds to the 2020 Crisis

Sustainable funds outperform funds with a low ESG rating during a period of financial crisis determined by an exogenous shock. This result is in accordance with those of Nofsinger and Varma [12], Lins et al. [13], Albuquerque et al. [23], Mirza et al. [24], and Xiong [25]. By contrast, these findings do not support the conclusions of Broadstock et al. [14], Folger-Laronde et al. [18], Hartzmark and Sussman [22], Demers et al. [19], and Chiappini et al. [20].
Our results derive from the comparison of the financial performance of the funds before the COVID-19 pandemic and during the pandemic period. The more sustainable funds appeared to react better to the unexpected event of the pandemic both in terms of returns and risk. The basic preliminary analysis of the descriptive statistics indicates that, after the structural break (20 February 2020), the high ESG funds were able to recover more rapidly and that, with the event study-based methodology, it was possible to show their superior level of resilience. With regard to risk, the univariate GARCH model exhibits a leverage effect: The negative shocks affected volatility to a greater degree than the positive shocks (which this is true for all the funds analyzed). Instead, the multivariate GARCH models highlight the lower conditional correlation level of the volatility processes between the benchmark (represented by the MSCI Europe index) and the sustainable funds. This finding is even clearer for the estimates related to the pandemic period. The volatility analysis shows that the COVID-19 pandemic increased the contagion risk, but the sustainable funds had a superior ability to face this type of risk, as was already reported by Ouchen [26] for an ESG portfolio.
Sustainable investment funds can be also seen as an insurance instrument against unexpected risks. These financial instruments should be considered not only by investors with pro-social preferences but also by investors aiming to build an optimal portfolio. Investors have to consider that sustainable funds exhibit a higher level of resilience and the ability to reduce the risk of financial contagion, especially during periods of crisis. As already highlighted by Yingxu [27], the ESG rating should be considered as an indicator of resilience in times of crisis.

References

  1. Contini, D.; Costabile, F. Does Air pollution Influence COVID-19 Outbreak? Atmosphere 2020, 11, 377.
  2. Setti, L.; Passarini, F.; De Gennaro, G.; Di Giulio, A.; Palmisani, J.; Buono, P.; Fornari, G.; Perrone, M.G.; Piazzalunga, A.; Barbieri, P.; et al. Evaluation of the Potential Relationship Between Particulate Matter (PM) Pollution and COVID-19 Infection Spread in Italy. BMJ 2020, 10.
  3. Conticini, E.; Frediani, B.; Caro, D. Can atmospheric pollution be considered a co-factor in extremely high level of SARS-CoV-2 lethality in Northern Italy? Environ. Pollut. 2020, 261, 114465.
  4. ECB. Economic Bulletin; European Central Bank: Frankfurt, Germany, 2020.
  5. Coibion, O.; Gorodnichenko, Y.; Weber, M. The Cost of the COVID-19 Crisis: Lockdowns, Macroeconomic Expectations, and Consumer Spending; NBER Work. Pap. No. w27141; National Bureau of Economic Research: Cambridge, MA, USA, 2020.
  6. IMF. World Economic Outlook Update: A Crisis Like No Other, an Uncertain Recovery; The International Monetary Fund: Washington, DC, USA, 2020.
  7. Guerrieri, V.; Guido, L.; Straub, L.; Werning, I. Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages? NBER Work. Pap. No. w26918; National Bureau of Economic Research: Cambridge, MA, USA, 2020; pp. 1–36.
  8. Bonaccorsi, G.; Pierri, F.; Cinelli, M.; Porcelli, F.; Galeazzi, A.; Flori, A.; Schmidth, A.L.; Valensise, C.M.; Scala, A.; Quattrociocchi, W.; et al. Economic and Social Consequences of Human Mobility Restrictions Under COVID-19. Proc. Natl. Acad. Sci. USA 2020, 117, 15530–15535.
  9. Liu, H.; Manzoor, A.; Manzoon, Z.; Wang, C.; Zhang, L. The COVID-19 outbreak and affected countries stock markets response. Int. J. Environ. Res. Public Health 2020, 17, 2800.
  10. Meher, B.K.; Hawaldar, I.T.; Mohapatra, L.; Spulbar, C.; Birau, R. The effects of ESG scores on investment returns and stock volatility. Int. J. Energy Econ. Policy 2020, 10, 4.
  11. McWilliams, A.; Siegel, D. Corporate social responsibility: A theory of the firm perspective. Acad. Manag. Rev. 2001, 26, 117–127.
  12. Nofsinger, J.; Varma, A. Socially responsible funds and market crises. J. Bank. Financ. 2014, 48, 180–193.
  13. Lins, K.V.; Servaes, H.; Tamayo, A. Social capital, trust, and firm performance: The value of corporate social responsibility during the financial crisis. J. Financ. 2017, 72, 4.
  14. Broadstock, D.C.; Chan, K.; Cheng, L.; Wang, X. The role of ESG performance during times of financial crisis: Evidence from COVID-19 in China. Financ. Res. Lett. 2021, 38, 101716.
  15. Engelhardt, N.; Ekkenga, J.; Posch, P. ESG Ratings and Stock Performance during the COVID-19 Crisis. Sustainability 2021, 13, 7133.
  16. Leite, P.; Cortez, M.C. Performance of European socially responsible funds during market crises: Evidence from France. Int. Rev. Financ. Anal. 2015, 40, 132–141.
  17. Matallín-Sáez, J.C.; Soler-Domínguez, A.; de Mingo-López, D.V.; Tortosa-Ausina, E. Does socially responsible mutual fund performance vary over the business cycle? New insights on the effect of idiosyncratic SR features. Bus. Ethics 2019, 28, 71–98.
  18. Folger-Laronde, Z.; Pashang, A.; Feor, L.; ElAlfy, A. ESG Ratings and Financial Performance of Exchange-Traded Funds During the COVID-19 pandemic. J. Sustain. Financ. Invest. 2020, 1–7.
  19. Demers, E.; Hendrikse, J.; Joos, P.; Lev, B. ESG did not immunize stocks during the COVID-19 crisis, but investments in intangible assets did. J. Bus. Finance Account. 2021, 48, 3–4.
  20. Chiappini, H.; Vento, G.; De Palma, L. The Impact of COVID-19 Lockdowns on Sustainable Indexes. Sustainability 2021, 13, 1846.
  21. Revelli, C.; Viviani, J.L. Financial performance of socially responsible investing (SRI): What have we learned? A meta-analysis. Bus. Ethics Eur. Rev. 2015, 24, 158–185.
  22. Hartzmark, S.M.; Sussman, A.B. Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows. J. Financ. 2019, 74, 6.
  23. Albuquerque, R.; Koskinen, Y.; Yang, S.; Zhang, C. Resiliency of Environmental and Social Stocks: An Analysis of the Exogenous COVID-19 Market Crash. Rev. Corp. Financ. Stud. 2020, 9, 593–621.
  24. Mirza, N.; Naqvi, B.; Rahat, B.; Rizvi, S.K.A. Price reaction, volatility timing and funds’ performance during Covid-19. Financ. Res. Lett. 2020, 36, 101657.
  25. Xiong, J.X. The Impact of ESG Risk on Stocks. J. Impact ESG Investig. 2021, 2, 7–18.
  26. Ouchen, A. Is the ESG portfolio less turbulent than a market benchmark portfolio? Risk Manag. 2021, 1–33.
  27. Yingxu, Y. The impact of ESG performance during times of crisis. Perspectives 2020, 53. Available online: http://unipub.lib.uni-corvinus.hu/6734/1/Green_Financial_Perspectives.pdf#page=55 (accessed on 22 November 2021).
More
© Text is available under the terms and conditions of the Creative Commons Attribution (CC BY) license; additional terms may apply. By using this site, you agree to the Terms and Conditions and Privacy Policy.
Upload a video for this entry
Information
Subjects: Business, Finance
Contributor MDPI registered users' name will be linked to their SciProfiles pages. To register with us, please refer to https://encyclopedia.pub/register :
Giorgia Russo
View Times: 713
Entry Collection: COVID-19
Revisions: 2 times (View History)
Update Date: 16 Dec 2021
Table of Contents
    1000/1000
    Hot Most Recent
    Video Production Service
    Feedback