Environmental, social, and governance practices and perceived tail risk

Shafer, Michael S.; Szado, Edward

doi:10.1111/acfi.12541

Cited by 32 publications

(11 citation statements)

References 58 publications

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“…Until now, most scholars have focused on the link between ESG scores and corporate financial performance (e.g., Friede et al (2015); Cornett et al (2016); Henke (2016); El Ghoul et al (2017); Hou et al (2019); Behl et al (2021); Kalaitzoglou et al (2021)). Then recently, some studies have started to analyze the link between ESG scores and risk measures (e.g., Shafer et al (2020); Bax et al (2021); Giese et al (2021); Maiti (2021)). Additionally, ESG data quality issues and the impact of ESG‐type corporate disclosures on investment allocations have been another center of attention in the ESG literature and which is where our work contributes.…”

Section: Literature Reviewmentioning

confidence: 99%

Environmental, Social, Governance scores and the Missing pillar—Why does missing information matter?

Şahin

Bax

Czado

et al. 2022

Corp Soc Responsibility Env

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Environmental, Social, and Governance (ESG) scores measure companies' performance concerning sustainability and are organized in three pillars: Environmental, Social, and Governance. These complementary non‐financial ESG scores should provide information about companies' ESG performance and risks. However, the extent of not yet published ESG information makes the reliability of ESG scores questionable. To explicitly capture the not yet published information on ESG category scores, a new pillar, the so‐called Missing (M) pillar, is proposed and added to the new definition of the Environmental, Social, Governance, and Missing (ESGM) scores. By relying on the data provided by Refinitiv, we show that the ESGM scores strengthen the companies' risk relationship. These new scores could benefit investors and practitioners as ESG exclusion strategies using only ESG scores might exclude assets with a low score solely because of their missing information and not necessarily because of a low ESG merit.

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Section: Literature Reviewmentioning

confidence: 99%

Environmental, Social, Governance scores and the Missing pillar—Why does missing information matter?

Şahin

Bax

Czado

et al. 2022

Corp Soc Responsibility Env

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“…This could lead to potential valuation risk which should be considered before any investment decision (Dunn et al, 2018;Lioui, 2018;Pollard et al, 2018;Berg and Lange, 2020). Some researchers argue that responsible ESG practices might mitigate the market's perception of a company's tail risk and, therefore, reduce ex-ante expectations of a left-tail event (Shafer and Szado, 2018). In brief, they state that considering responsible business practices when creating an equity portfolio can act as insurance against left-tail risk and, with that, protect company value.…”

Section: Esg Scores Dependence and Riskmentioning

confidence: 99%

“…Ashwin Kumar et al (2016) add that positive ESG practices can make a company less vulnerable to reputation, political and regulatory risk and thus leading to lower volatility of cash flows and profitability' (p. 292). Furthermore, positive ESG performance may generate more loyalty from customers and employees plus, through that, protect companies from unforeseen harmful events, resulting in reduced tail risk (Shafer and Szado, 2018). Besides, better ESG performance allows companies to experience adverse events less often and loose less value if they do occur (Minor, 2011).…”

Section: Esg Scores Dependence and Riskmentioning

confidence: 99%

“…However, their findings are limited as they are based on one single institutional investor. Additionally, Sherwood and Pollard (2017) finds that inte-grating ESG emerging market equities into institutional portfolios can create higher returns and lower downside risks compared to non-ESG equity investments, while Shafer and Szado (2018) add that better ESG performance significantly reduces the perceived one-month ahead tail risk.…”

Section: Esg Scores Dependence and Riskmentioning

confidence: 99%

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ESG, Risk, and (Tail) Dependence

Bax¹,

Şahin²,

Czado³

et al. 2021

Preprint

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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 ratings. 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, 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 dependencies between clusters determined by ESG scores, especially during the 2008 crisis.

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“…Recently, Bax et al (2021) have shown, using vine copula models, that ESG scores exhibit around 30% a (tail) dependence relationship with the Value-at-Risk (VaR) risk measure. Other scholars find that better ESG ratings can be linked to lower downside risk and also reduce perceived tail risk (e.g., Shafer & Szado (2020); Giese et al (2021); Lööf et al (2021)). ESG ratings, therefore, could carry information on risk and help investors to distinguish stocks with high-risk exposure (Lööf et al, 2021).…”

Section: Introductionmentioning

confidence: 99%

Environmental, Social, Governance scores and the Missing pillar -- Why does missing information matter?

Sahin,

Bax,

Czado

et al. 2021

Preprint

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Environmental, social, and governance (ESG) scores measure companies' activities concerning sustainability and societal impact and are organized on three pillars: Environmental (E-), Social (S-), and Governance (G-). Different approaches have been proposed to compute ESG scores for companies, which typically rely on the aggregation of many and different sources of information. These complementary non-financial ESG scores should provide information about the ESG performance and risks of different companies. However, the extent of missing information makes the reliability of ESG scores questionable. To account for the missing information in the underlying ESG pillars, we introduce a new pillar, the so-called Missing (M-) pillar, and propose an optimization approach to compute new ESG (ESGM) scores, which should also be related to the company riskiness. As a result, the ESGM scores allow for incorporating the extent of missing information and establishing some meaningful relationship with respect to the riskiness of the companies under consideration. Interesting insights into the current limitations of ESG scoring methodology are discussed.

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Environmental, social, and governance practices and perceived tail risk

Cited by 32 publications

References 58 publications

Environmental, Social, Governance scores and the Missing pillar—Why does missing information matter?

Environmental, Social, Governance scores and the Missing pillar—Why does missing information matter?

ESG, Risk, and (Tail) Dependence

Environmental, Social, Governance scores and the Missing pillar -- Why does missing information matter?

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