Environmental, Social, and Governance Considerations in WTI Financialization through Energy Funds

Abstract

This study investigates interactions between energy funds and the oil market and examines the influence of environmental, social, and governance (ESG) criteria in dynamic responses by fund managers and investors. We test for price and volatility transmission (also referred to as “spillover”) between energy funds and the oil market using recently developed econometric techniques. After identifying specific information flows, we investigate whether certain fund characteristics, including several ESG dimensions, are associated with the existence of information transmissions. Then, in logit regressions, we seek to identify if energy fund managers and their investors make decisions using information regarding ESG metrics, including fossil fuel involvement. The results confirm bidirectional price and volatility transmission between energy funds and the oil market, consistent with evidence of the financialization of energy markets that has been identified in recent studies. Several ESG dimensions are shown to influence investor sentiment and affect price and volatility interactions. Dynamic investor decisions in funds in reaction to oil prices do not appear to be strongly influenced by the fossil fuel involvement of the funds. Fund flows do appear to influence the oil market, with fund fossil fuel involvement being an important factor. This paper evaluates the impact of granular ESG characteristics on energy mutual fund flows, price, and volatility interactions with the oil market. While our results support the findings from previous studies, they also provide several new insights into the impacts of ESG criteria and investor behavior, particularly the dynamic response by fund managers and energy market investors related to the fossil fuel involvement of the funds.

Assessing Energy Mutual Funds: Performance, Risks, and Managerial Skills

“…Some studies have examined the performance of mutual funds and exchange-traded funds that invest in the energy sector. Gormus et al (2023) conducted a study to assess the volatility and price transmission relationships between the oil market and energy funds. The study found a robust price transmission from energy funds to oil prices and a bidirectional information flow in terms of volatility transmission between the oil market and the funds.…”

Impact of Water Management Policies on Volatility Transmission in the Energy Sector

“…Several researchers found volatility transmissions between these markets in varying directions and with varying degrees of statistical significance (see Le and Chang 2015;Mensi et al 2017;Gormus et al 2014). Energy mutual funds heavily interact with the energy commodity markets (Gormus et al 2018(Gormus et al , 2023. Of particular interest when examining oil and gas focused mutual funds is how a firm deals with water issues.…”

“…The literature shows ESG components to be significant in relation to driving integration between energy funds and energy commodities (Gormus et al 2023). However, the implications of water-related dimensions have not been explored.…”

Explore the Impact of Macroeconomic Indicators on WTI Oil Prices

“…Moreover, studies have probed into the socio-political effects on the energy market, particularly the impacts of US political actions on the WTI-Brent spread [4]. The environmental, social, and governance considerations in WTI financialization through energy funds have also been analyzed [5]. The negative pricing of the WTI contract in May 2020 has also been examined, shedding light on unusual market conditions [6].…”