The Relationship Between ESG Scores and Value-at-Risk: A Vine Copula–GARCH Based Approach

Stefano Demartis () and Barbara Rogo
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Stefano Demartis: Department of Statistical Sciences, Sapienza University of Rome, 00185 Rome, Italy
Barbara Rogo: Department of Statistical Sciences, Sapienza University of Rome, 00185 Rome, Italy

JRFM, 2024, vol. 17, issue 11, 1-16

Abstract: Recently, the introduction of Environmental, Social, and Governance (ESG) scores has become crucial for investment decisions and in minimizing portfolio risk. This study aims to understand the relationship between ESG scores and Value-at-Risk (VaR), computed by using a Vine copula–GARCH based approach, chosen for its reliability in detecting interdependencies among multiple stocks. In fact, one of the main challenges in estimating VaR for a stock portfolio is capturing the dependence structure among a large number of assets. The dataset consists of 16 companies listed on the FTSE100 index. The corresponding ESG scores were collected over a comprehensive period of five years, from 2018 to 2022, covering both normal and stressed market conditions. Additionally, a focused analysis was conducted for the period from 2020 to 2022 to isolate the specific effects of the COVID crisis. The results indicate that an increase in assets with the highest ESG scores reduces potential losses in the portfolio. This finding underscores the importance of integrating high-level ESG scores into portfolios to mitigate market risk. Additionally, during periods characterized by stressed market conditions, the impact of ESG scores on VaR is even more pronounced, demonstrating that sustainable assets are more resilient in times of crisis.

Keywords: ESG; VaR; Kendall’s tau; equity risk; Vine copulas (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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