Cross-border ESG rating dynamics: An in-depth connectedness analysis of portfolio returns and volatilities in the USA and Canada

Carlos Esparcia, Mariya Gubareva, Tatiana Sokolova and Francisco Jareño

The North American Journal of Economics and Finance, 2025, vol. 75, issue PA

Abstract: This study uses a time-varying parameter vector autoregression (TVP-VAR) model to examine the dynamic relationship between rating changes and portfolio returns in the US and Canada across the environmental (E), social (S), governance (G) and total ESG assessment pillars. The analysis includes both return and volatility spillovers and covers the period from March 2009 to October 2022. The study reveals a fluctuating pattern of connectedness, influenced by global financial events, such as the 2008 financial crisis. In particular, the US shows higher levels of connectedness. Rating changes, particularly in the ESG dimension, show stronger spillovers than returns, highlighting their importance in portfolio construction. The study further explores net connectedness profiles, identifying ESG rating changes as net transmitters. The results suggest that investors should prioritize rating changes over returns, highlighting the importance of considering ESG factors in portfolio management, especially the social criterion, to mitigate investment risks. The research contributes to the understanding of ESG dynamics in international equity markets and provides valuable insights for investors and market regulators.

Keywords: TVP-VAR model; ESG assessment pillars; Connectedness; Rating changes; Portfolio construction; Investment risks (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:75:y:2025:i:pa:s1062940824002079

DOI: 10.1016/j.najef.2024.102282

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