ESG,risk, and (tail) dependence |
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| Affiliation: | 1. Departament d’Econometria, Estadística i Economia Aplicada, Universitat de Barcelona (UB), Spain;2. School of Finance, Economics and Government, Universidad EAFIT, Medellín, Colombia;3. Faculty of Economics and Business, Universitat Oberta de Catalunya, Spain;1. Department of Accounting and Finance, United Arab Emirates University, Al Ain, United Arab Emirates;2. Department of Finance and Investment, College of Economics and Administrative Sciences, Imam Mohammad Ibn Saud Islamic University (IMSIU), Riyadh, Saudi Arabia;3. University of Sfax, Higher Institute of Business Administration, Tunisia;4. Department of Management and Engineering, Linköping University, 581 83 Linköping, Sweden;5. Business School, Hunan University, Changsha 410082, PR China;1. School of Accounting, Capital University of Economics and Business, Beijing 100070, China;2. Business School, University of International Business and Economics, Beijing 100029, China;3. School of Economics and Management, Tsinghua University, Beijing 100190, China;1. Audencia Business School, Research Center: Markets Technology and Society, 8 Route de la Joneliere, 44312 Cedex 3, Nantes, France;2. Heriot Watt University, Accounting, Economics and Finance SEEC, CFI, Edinburgh, Scotland EH14 4AS, UK;1. School of Public Administration, Nanjing university of Finance and Economics, China;2. Department of History of Science, Technology and Medicine, Peking University, China |
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| Abstract: | While environmental, social, and governance (ESG) trading activity has been a distinctive feature of financial markets, the debate if ESG scores can also convey information regarding a company’s riskiness remains open. Regulatory authorities, such as the European Banking Authority (EBA), have acknowledged that ESG factors can contribute to risk. Therefore, it is important to model such risk dependencies and quantify what part of a company’s riskiness can be attributed to the ESG scores. This paper aims to question whether ESG scores can be used to provide information on (tail) riskiness. By analyzing the (tail) dependence structure of companies with a range of ESG scores, that is within an ESG rating class, using high-dimensional vine copula modeling, we are able to show that risk can also depend on and be directly associated with a specific ESG rating class. Empirical findings on real-world data show positive not negligible ESG risks determined by ESG scores, especially during the 2008 crisis. |
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| Keywords: | ESG scores Risk Dependence Tail dependence Vine copula models |
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