ESG Investment and Risks: Conceptualise the Unexpected
DOI:
https://doi.org/10.24191/e-aj.v12i1.12230Keywords:
ESG Investment, ESG-Related Risks, Black Swan, Markowitz Portfolio Theory, Southeast AsianAbstract
Investors are integrating ESG factors into their decision-making processes to invest sustainably and gain competitive returns. The presence of risks from the recent past and the near future and the occurrence of a rare, unforeseeable, and economically significant event, known as a black swan event, hinder their ability to make sound investment decisions. In light of this, our study aims to
develop a conceptual framework for the risk-return issue in ESG investments. The Southeast Asia region will be emphasised more due to its potential for future ESG investment growth and higher returns. Consequently, our investigation provides two possible frameworks to measure the relationship between ESG risks and ESG firms' stock returns in Southeast Asia. In the absence of ESG indices in the region, local ESG companies listed on stock markets have been suggested as a viable alternative.
References
Aich, S., Thakur, A., Nanda, D., Tripathy, S., & Kim, H.-C. (2021). Factors affecting ESG towards impact on investment: A structural approach. Sustainability, 13(19), 1–14. https://doi.org/10.3390/su131910868
Ali, K., Abbas, S., & Ullah, S. (2019). The impact of "Black Swan Events" on beta and returns: Evidence from Shanghai composite index and Pakistan stock exchange PSX (KSE-100). A case study of China and Pakistan. European Academic Research, VII(2), 1401–1422.
Aven, T. (2013). On the meaning of a black swan in a risk context. Safety Science, 57, 44–51. https://doi.org/10.1016/j.ssci.2013.01.016
Aven, T. (2014). Risk, Surprises and Black Swans: Fundamental Ideas and Concepts in Risk Assessment and Risk Management (1st ed.). Routledge Taylor & Francis Group.
Aven, T. (2015). Implications of black swans to the foundations and practice of risk assessment and management. Reliability Engineering and System Safety, 134, 83–91. https://doi.org/10.1016/j.ress.2014.10.004
Beloskar, V. D., & Rao, S. V. D. N. (2022). Did ESG save the day? Evidence from India during the COVID19 crisis. Asia-Pacific Financial Markets, 1–35. https://doi.org/10.1007/s10690-022-09369-5
Bodie, Z., Kane, A., Marcus, A. J., & Jain, R. (2014). Investments (Ninth Edit). McGraw-Hill Education (Asia).
Bruno, G., Esakia, M., & Goltz, F. (2021). "Honey, I shrunk the ESG alpha": Risk-adjusting ESG portfolio returns. The Journal of Investing, April, 1–44. https://doi.org/10.3905/joi.2021.1.215
Browne, R. (2021, May 10). Ethereum: What is it and how is it different from bitcoin? CNBC.
https://www.cnbc.com/2021/05/10/ethereum-what-is-it-and-how-is-it-different-to-bitcoin.html
Buchholz, K. (2021, March 17). Cryptocurrency: How common is crypto? Statista.
https://www.statista.com/chart/18345/crypto-currency-adoption/
Chelawat, CA. H., & Trivedi, I. V. (2015). Does ESG investment enhance investment returns. Business Review, 10(2), 100–115. https://doi.org/10.54784/1990-6587.1356
Cho, R. (2021, September 16). Bitcoin impacts on climate and the environment. State of the Planet.
https://news.climate.columbia.edu/2021/09/20/bitcoins-impacts-on-climate-and-the-environment/
Ciaian, P., Cupak, A., Fessler, P., & Kancs, d’Artis. (2022). Environmental-social-governance preferences and investments in Crypto-assets (No. 243). http://arxiv.org/abs/2206.14548
Conklin, M., & Malone, J. (2023). Putting cryptocurrency in its place: The case for why ESG funds should exclude Cryptocurrency investments. Berkeley Business Law Journal, 20(1), 1–38. https://doi.org/10.2139/ssrn.4323993
Cornell, B. (2021). ESG preferences, risk and return. European Financial Management, 27(1), 12–19.
https://doi.org/10.1111/eufm.12295
COSO, & WBCSD. (2018). Enterprise risk management: Applying enterprise risk management to environmental, social and governance-related risks. In Enterprise risk management: Applying enterprise risk management to environmental, social and governance-related risks.
https://www.coso.org/Documents/COSO-WBCSD-ESGERM-Guidance-Full.pdf
Demers, E., Hendrikse, J., Joos, P., & Lev, B. (2021). ESG did not immunise stocks during the COVID-19 crisis, but investments in intangible assets did. Journal of Business Finance and Accounting, 48(3–4), 433–462. https://doi.org/10.1111/jbfa.12523
Diaye, M. A., Ho, S. H., & Oueghlissi, R. (2022). ESG performance and economic growth: A panel cointegration analysis. Empirica, 49(1), 99–122. https://doi.org/10.1007/s10663-021-09508-7
Dorfleitner, G., Halbritter, G., & Nguyen, M. (2016). The risk of social responsibility – is it systematic? Journal of Sustainable Finance & Investment, 6(1), 1–14.
https://doi.org/10.1080/20430795.2015.1123993
Engle, R. (2004). Risk and volatility: Econometric models and financial practice. The American Economic Review, 94(3), 405–420. http://www.jstor.org/stable/3592935
Estrada, J. (2007). Black swans and market timing: How not to generate alpha. SSRN Electronic Journal, 1–20. https://doi.org/10.2139/ssrn.1032962
Estrada, J. (2008). Investing in emerging markets: A black swan perspective. SSRN Electronic Journal, 1–10. https://doi.org/10.2139/ssrn.1308082
Estrada, J., & Vargas, M. (2012). Black swans, beta, risk, and return. Journal of Applied Finance (Formerly Financial Practice and Education), 22(2). http://ssrn.com/abstract=1692490
European Banking Authority. (2021, June). ESG risks management and supervision: Factsheet on ESG Risk Management and Supervision. European Banking Authority, June, 1–2. https://doi.org/10.2853/65085
Ferriani, F., & Natoli, F. (2021). ESG risks in times of Covid-19. Applied Economics Letters, 28(18), 1537–1541. https://doi.org/10.1080/13504851.2020.1830932
Friede, G., Busch, T., & Bassen, A. (2015). ESG and financial performance: aggregated evidence from more than 2000 empirical studies. Journal of Sustainable Finance and Investment, 5(4), 210–233. https://doi.org/10.1080/20430795.2015.1118917
Golding, O., Yu, G., Lu, Q., & Xu, X. (2022). Carboncoin: Blockchain tokenisation of carbon emissions with ESG-based reputation. IEEE International Conference on Blockchain and Cryptocurrency (ICBC), 1–5. https://doi.org/10.1109/ICBC54727.2022.9805516
Government Actuary's Department. (2019, February). Investment News. Government Actuary's Department, 1–2. https://www.gov.uk/government/publications/investment-and-risk-monthlyupdates
Green, N. (2022, February 22). Bitcoin could be the most ESG-friendly part of your portfolio. Asia Times.https://asiatimes.com/2022/02/bitcoin-could-be-the-most-esg-friendly-part-of-yourportfolio/
Hang Seng Index. (2023, June). Impact of black swan events on ESG relevance. Hang Seng Indexes.
https://www.hsi.com.hk/static/uploads/contents/en/dl_centre/research_paper/20220628T000000.pdf
Hayat, U., & Orsagh, M. (2015). Environmental, Social and Governance Issues in Investing. A Guide for Investment Professionals. CFA Institute. https://www.cfainstitute.org/-/media/documents/article/position-paper/esg-issues-in-investing-a-guide-for-investmentprofessionals.ashx
Head, G. L. (1967). An alternative to defining risk as uncertainty. Source: The Journal of Risk and Insurance, 34(2), 205–214. http://www.jstor.org/stable/251319
Heijningen, K. van. (2019). The impact of ESG factor materiality on stock performance of firm. In Erasmus Platform for Sustainable Value Creation Working paper (Erasmus Platform for Sustainable Value Creation).
Heugh, K., Fox, M., & Tsui, E. (2021). ESG and Sustainable Investing Report (Issue February).
Huang, D., Christian Sclag, Shaliastovich, I., & Thimme, J. (2018). Volatility-of-volatility risk. In SSRN Electronic Journal (No. 210; SAFE Working Paper). Elsevier B.V.
https://doi.org/10.2139/ssrn.3183610
J.P.Morgan. (2020, July 1). Why covid-19 could be a major turning point for ESG investing.J.P. Morgan.https://www.jpmorgan.com/insights/research/covid-19-esg-investing
Khan, M. (2019). Corporate governance, ESG, and stock returns around the world. Financial Analysts Journal, 75(4), 103–123. https://doi.org/10.1080/0015198X.2019.1654299
Khemir, S., Baccouche, C., & Ayadi, S. D. (2019). The influence of ESG information on investment allocation decisions: An experimental study in an emerging country. Journal of Applied Accounting Research, 20(4), 458–480. https://doi.org/10.1108/JAAR-12-2017-0141
Knight. Frank H. (1921). The meaning of risk and uncertainty. In Risk, Uncertainty and Profit (pp. 197–232). The Riverside Press Cambridge.
Korwatanasakul, U. (2020). Environmental, social, and governance investment: Concepts, prospects, and the policy landscape. In N. Nemoto & P. J. Morgan (Eds.), Environmental, Social, and Governance Investment: Opportunities and Risks for Asia (pp. 1–31). Asian Development Bank Institute.
Kumar, A. N. C., Smith, C., Badis, L., Wang, N., Ambrosy, P., & Tavares, R. (2016). ESG factors and riskadjusted performance: A new quantitative model. Journal of Sustainable Finance and Investment, 6(4), 292–300. https://doi.org/10.1080/20430795.2016.1234909
Lin, J. C., Lee, J. Y., & Liu, W. Y. (2021). Risk analysis of regions with suspicious illegal logging and their trade flows. Sustainability (Switzerland), 13(6). https://doi.org/10.3390/su13063549
Lintner, J. (1965). Security prices, risk, and maximal gains from diversification. The Journal of Finance, XX(4), 587–615. https://onlinelibrary.wiley.com/doi/epdf/10.1111/j.1540-6261.1965.tb02930.x
Malkiel, B. G. (1973). A Random Walk Down Wall Street. W. W. Norton Company.
Markowitz, H. (1952). Portfolio selection. The Journal of Finance, 7(1), 77–91. https://doi.org/10.1111/j.1540-6261.1952.tb01525.x
Mohamed Yousop, N. L., Wan Zakaria, W. M. F., Ahmad, Z., Ramdhan, N., Mohd HAsan Abdullah, N., & Rusgianto, S. (2021). Lunar effect on stock returns and volatility: An empirical study of Islamic countries*. Journal of Asian Finance, 8(5), 533–0542. https://doi.org/10.13106/jafeb.2021.vol8.no5.0533
Morelli, G., & D’Ecclesia, R. (2021). Responsible investments reduce market risks. Decisions in Economics and Finance, 44(2), 1211–1233. https://doi.org/10.1007/s10203-021-00351-w
Mossin, J. (1966). Equilibrium in a capital asset market. Econometrica, 34(4), 768–783. https://doi.org/10.2307/1910098
Murugaboopathy, P. (2021, December 17). Global sustainable shares post record gains in 2021.
Reuters.https://www.reuters.com/markets/stocks/global-markets-esg-2021-12-17/
OECD. (2021). ESG Investing and Climate Transition: Market Practices, Issues and Policy Considerations. https://www.oecd.org/finance/ESG-investing-and-climate-transition-marketpractices-issues-and-policy-considerations.pdf
Omura, A., Roca, E., & Nakai, M. (2021). Does responsible investing pay during economic downturns:
Evidence from the COVID-19 pandemic. Finance Research Letters, 42(101914), 1–7. https://doi.org/10.1016/j.frl.2020.101914
Pedersen, L. H., Fitzgibbons, S., & Pomorski, L. (2021). Responsible investing: The ESG-efficient frontier.
Journal of Financial Economics, 142(2), 572–597. https://doi.org/10.1016/j.jfineco.2020.11.001
PRI (2022, December 1). UOB Asset Management: A 'Man-and-machine' approach to ESG investing in ASEAN. PRI Association. https://www.unpri.org/the-pri-awards/uob-asset-management-a-manand-machine-approach-to-esg-investing-in-asean/10784.article
Rabbani, M. R., Alshaikh, A., Jreisat, A., Bashar, A., & Moh'D Ali, M. A. (2021). Whether cryptocurrency is a threat or a revolution? An analysis from ESG perspective. 2021 International Conference on Sustainable Islamic Business and Finance, 103–108.
https://doi.org/10.1109/IEEECONF53626.2021.9686332
Reuter, J. (2013). Risk and Uncertainty. In Diagnosing & Engaging with Complex Environmental Problems (pp. 195–201).
Singh, A. (2020). COVID-19 and safer investment bets. Finance Research Letters, 36(101729), 1–7.
https://doi.org/10.1016/j.frl.2020.101729
Seneviratne, S. I., Nicholls, N., Easterling, D., Rusticucci, M., Semenov, V., Alexander, L. v, Allen, S., Benito, G., Cavazos, T., Nicholls, N., Easterling, D., Goodess, C., Kanae, S., Kossin, J., Luo, Y., Marengo, J., McInnes, K., Rahimi, M., Reichstein, M., … Midgley, P. (2012). Changes in climate extremes and their impacts on the natural physical environment. In M. Rusticucci & V. Semenov (Eds.), Managing the Risks of Extreme Events and Disasters to Advance Climate Change Adaptation (pp. 109–230). Cambridge University Press.
Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, XIX(3), 425–442. https://onlinelibrary.wiley.com/doi/epdf/10.1111/j.1540-6261.1964.tb02865.x
Smart, S. B., Gitman, L. J., & Joehnk, M. D. (2017). Fundamentals of Investing (13th Edition). Pearson Education Limited.
Taleb, N. N. (2007). The Black Swan: The Impact of the Highly Improbable (First Edition). Random House, United States.
Toma, S.-V., Chiriţă, M., & Şarpe, D. (2012). Risk and Uncertainty. Procedia Economics and Finance, 3, 975–980. https://doi.org/10.1016/S2212-5671(12)00260-2
United Nations (2023). World economic situation and prospects 2023. New York
U.S. Securities and Exchange Commission. (2021, April 21). The division of examinations' review of ESG investing *. U.S. Securities and Exchange Commission, 1–7.
Whelan, T., Atz, U., van Holt, T., & Clark, C. (2021). ESG and Financial Performance: Uncovering the Relationship by Aggregating Evidence from 1,000 Plus Studies Published between 2015-2020. https://www.stern.nyu.edu/sites/default/files/assets/documents/ESG Paper Aug 2021.pdf
Zhou, D., & Zhou, R. (2022). ESG performance and stock price volatility in public health crisis: Evidence from COVID-19 pandemic. International Journal of Environmental Research and Public Health, 202(19), 1–15. https://doi.org/10.3390/ijerph1901020
Downloads
Published
Issue
Section
License
Copyright (c) 2023 Nur Liyana Mohamed Yousop, Nazrul Hisyam Ab Razak
This work is licensed under a Creative Commons Attribution 4.0 International License.
