ESG, Risk, and (Tail) Dependence

44 Pages Posted: 18 May 2021 Last revised: 19 Oct 2022

See all articles by Karoline Bax

Karoline Bax

Technische Universität München (TUM) - TUM School of Management

Özge Sahin

Technische Universität München (TUM)

Claudia Czado

Technische Universität München (TUM) - Department of Mathematics

Sandra Paterlini

University of Trento - Department of Economics and Management

Date Written: June 7, 2022

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 risks 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 modelling, 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.

Keywords: ESG scores, Risk, Dependence, Tail dependence, Vine Copula models

JEL Classification: G32, C51, C58

Suggested Citation

Bax, Karoline and Sahin, Özge and Czado, Claudia and Paterlini, Sandra, ESG, Risk, and (Tail) Dependence (June 7, 2022). Available at SSRN: https://ssrn.com/abstract=3846739 or http://dx.doi.org/10.2139/ssrn.3846739

Karoline Bax (Contact Author)

Technische Universität München (TUM) - TUM School of Management ( email )

Freising
Germany

Özge Sahin

Technische Universität München (TUM) ( email )

Claudia Czado

Technische Universität München (TUM) - Department of Mathematics ( email )

Sandra Paterlini

University of Trento - Department of Economics and Management ( email )

Via Inama 5
Trento, I-38100
Italy

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
531
Abstract Views
2,014
Rank
99,795
PlumX Metrics