Environmental, social, and governance (ESG) investing and commodities: dynamic connectedness and risk management strategies

Abstract

Purpose

The purpose of this study is to examine the dynamic connectedness and volatility spillovers between commodities and corporations exhibiting the best environmental, social and governance (ESG) practices. In addition, the authors determine the optimal hedge ratios and portfolio weights for ESG and commodity investors and portfolio managers.

Design/methodology/approach

This study uses the novel frequency connectedness framework to point out volatility spillover between ESG indices covering the USA, developed and emerging markets and commodity indices, including energy (crude oil, natural gas and heating oil), industrial metals (aluminum, copper, zinc, nickel and lead) and precious metals (gold and silver) by using daily data between January 3, 2011 and May 26, 2021, covering significant socio-economic developments and the COVID-19 outbreak.

Findings

The results of this study suggest a total connectedness index at a mediocre level, mainly driven by the shocks creating uncertainty in the short term. And the results indicate that all ESG indices are net volatility transmitters, and all commodity indices other than crude oil and copper are net volatility receivers.

Practical implications

The results imply statistically significant hedging and portfolio diversification opportunities to investors and portfolio managers across the asset classes, proven by the hedging effectiveness analyses.

Social implications

This study provides implications for policymakers focusing on the risk of contagion among the commodity and ESG markets during turbulent periods to ensure international financial stability.

Originality/value

This study contributes to the existing literature by differentiating ESG portfolios as the USA, developed and developing markets and examining dynamic connectedness and volatility spillovers between ESG portfolios and commodities with a different technique. This study also contributes by considering COVID-19 outbreak.

Citation

Cagli, E.C.C., Mandaci, P.E. and Taşkın, D. (2023), "Environmental, social, and governance (ESG) investing and commodities: dynamic connectedness and risk management strategies", Sustainability Accounting, Management and Policy Journal, Vol. 14 No. 5, pp. 1052-1074. https://doi.org/10.1108/SAMPJ-01-2022-0014