The Impact of ESG Rating on Hedging Downside Risks: Evidence from a Weight-Tilted Hang Seng Index

Joseph K. W. Fung, F. Y. Eric Lam and Yiuman Tse ()
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Joseph K. W. Fung: Lee Shau Kee School of Business and Administration, Hong Kong Metropolitan University, Hong Kong, China
F. Y. Eric Lam: Citigroup, 388 Greenwich Street, New York, NY 10013, USA
Yiuman Tse: College of Business Administration, University of Missouri, St. Louis, MO 63121, USA

JRFM, 2024, vol. 17, issue 2, 1-17

Abstract: The study examines the return performance and resilience to market volatility of the recently introduced environment, social/sustainable, and governance (ESG) weight-tilted Hang Seng index compared to its parent, the Hang Seng index. The ESG-infused index has a higher mean return and lower return volatility than the parent index, although the differences are statistically and economically insignificant, a result consistent with the high correlation between the two index returns. Most importantly, the ESG weight-tilted index is more resilient to volatility spikes than the parent index and, therefore, has lower downside risks. The overall results show that stocks with high ESG ratings are less susceptible to trading pressures triggered by volatility-induced turnovers. The paper contributes to the literature by providing significant incremental information on the emerging market for ESG-related equity products in Hong Kong.

Keywords: ESG impact investing; index investing; ESG weight-tilted index; downside risk (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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