ESG Risk Exposure: A Tale of Two Tails

47 Pages Posted: 6 May 2022 Last revised: 13 Dec 2022

See all articles by Runfeng Yang

Runfeng Yang

Università Ca' Foscari Venezia

Massimiliano Caporin

University of Padua - Department of Statistical Sciences

Juan-Angel Jiménez-Martin

Complutense University of Madrid

Date Written: April 12, 2022

Abstract

Investing in ESG assets has now become the rule of thumb whenever investors want risk
shield, especially during the COVID period. Since ESG investments are evidenced to have
lower downside risk, how and to which extent the downside risk of a company is affected by
its ESG activities is of particular interest to investors and regulators. This paper studies the
ESG impact to the downside risk of companies in the US market by introducing a novel
measure, the ESG risk contribution (△CoESGRisk). △CoESGRisk is a measurement based
on the co-movement between the ESG risk factor (the realization of ESG activities in the
market) and the downside risk. We show that when there is a sudden increase in the ESG risk factor, the downside risk of high-ESG companies is reduced. However, under extreme conditions, the downside risk of high-ESG companies could also be increased. The ESG impact is positively correlated with the ESG performance and company size, and it varies among different sectors. Our paper provides investors with a new method for ESG risk management. For regulators, our new
measurement offers some references on evaluating the impact of ESG-related policies through
quantifying the ESG risk contribution.

Keywords: ESG, ESG Risk Factor, Fama/MacBeth Risk Factor, Quantile Regression, CoVaR, ESG Sentiment

JEL Classification: G12, G32, C51

Suggested Citation

Yang, Runfeng and Caporin, Massimiliano and Jiménez-Martin, Juan-Angel, ESG Risk Exposure: A Tale of Two Tails (April 12, 2022). Available at SSRN: https://ssrn.com/abstract=4082332 or http://dx.doi.org/10.2139/ssrn.4082332

Runfeng Yang (Contact Author)

Università Ca' Foscari Venezia ( email )

Venice
Italy

Massimiliano Caporin

University of Padua - Department of Statistical Sciences ( email )

Via Battisti, 241
Padova, 35121
Italy

Juan-Angel Jiménez-Martin

Complutense University of Madrid ( email )

Complutense University of Madrid
Campus de somosaguas
Pozuelo de Alarcon, Madrid 28223
Spain
+34 91 3942355 (Phone)

HOME PAGE: http://www.ucm.es/fundamentos-analisis-economico2/jajm

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

Paper statistics

Downloads
439
Abstract Views
1,433
Rank
113,156
PlumX Metrics