Risk exposure in ESG-driven portfolios: A wavelet study within the tail-concerned insurance sector

Francisco Jareño, Carlos Esparcia and Giulia Fantini

Finance Research Letters, 2024, vol. 67, issue PB

Abstract: This paper employs wavelet analysis methodology to examine the pairwise time-frequency connectedness and lead-lag relationships between ESG rating changes and insurance equity portfolios' risk exposure. Focusing on the influence of ESG rating changes rather than absolute levels, it contributes to existing research, shedding light on the nuanced dynamics within the insurance sector. The findings underscore the importance of incorporating ESG considerations into portfolio risk assessments for policymakers and portfolio managers alike. Notably, the study reveals the impact of ESG upgrades on portfolio risk exposure, suggesting potential higher returns but also higher total volatility. Moreover, disaggregate risk (total, downside and upside) analysis uncovers insights into environmental, social, and governance factors, emphasizing the relevance of navigating beyond the total volatility and the overall ESG ratings. These insights inform adaptive risk management strategies aligned with evolving ESG standards, contributing to sustainable and risk-conscious economic and investment decisions within the insurance sector.

Keywords: ESG; Equity; Insurance; Downside risk; Upside risk; Wavelets (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:67:y:2024:i:pb:s1544612324008857

DOI: 10.1016/j.frl.2024.105855

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