Evaluating the resilience of ESG investments in European Markets during turmoil periods

TL;DR

This study assesses how ESG investments in Europe perform during financial crises, finding they generally offer greater resilience than traditional investments despite regional differences in volatility.

Contribution

It provides a comparative analysis of ESG versus traditional investments during turmoil periods across major European markets using advanced volatility models.

Findings

ESG investments show higher volatility in Germany and Italy during crises.

ESG portfolios demonstrate greater resilience compared to traditional portfolios.

Regional variations affect ESG investment performance during market shocks.

Abstract

This study investigates the resilience of Environmental, Social, and Governance (ESG) investments during periods of financial instability, comparing them with traditional equity indices across major European markets-Germany, France, and Italy. Using daily returns from October 2021 to February 2024, the analysis explores the effects of key global disruptions such as the Covid-19 pandemic and the Russia-Ukraine conflict on market performance. A mixture of two generalised normal distributions (MGND) and EGARCH-in-mean models are used to identify periods of market turmoil and assess volatility dynamics. The findings indicate that during crises, ESG investments present higher volatility in Germany and Italy than in France. Despite some regional variations, ESG portfolios demonstrate greater resilience compared to traditional ones, offering potential risk mitigation during market shocks. These results underscore the importance of integrating ESG factors into long-term investment strategies, particularly in the face of unpredictable financial turmoil.