Abstract
In this study, we compare the volatility characteristics and return performance of MSCI Japan ESG Select Leaders Index (SLI) and, its parent index, MSCI Japan Investable Market Index (IMI). SLI is an environment, social and governance (ESG) index, which integrates firms’ ESG performance into the stock selection, and IMI is a conventional market capitalization-weighted index. We utilize the stochastic volatility (SV) model that integrates the Fama–French five— (FF5) factor model (Fama and French, J Fin Econ 116:1–22, 2015). The daily data of each index from January 5, 2015 to August 31, 2023 are used in the analysis. The results show that the asymmetry effect of volatility, which is the market anomaly of increased volatility immediately after price declines, in SLI is smaller than that of IMI, and no difference in the excess return to the market is shown between SLI and IMI. We also found that the COVID-19 pandemic increased the volatility of SLI and IMI, however the volatility of SLI expanded at a slower pace during the pandemic. Our empirical results indicate that considering corporate ESG initiatives when constructing indices or portfolios may make them more defensive in bearish market conditions without reducing the excess return.
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Availability of data and materials
The data that support the findings of this study are available from Nikkei NEEDS but restrictions apply to the availability of these data, which were used under license for the current study, and so are not publicly available. Data are however available from the authors upon reasonable request and with permission of Nikkei NEEDS.
Notes
Aono and Okimoto (2023) identify SLI as the major ESG index in Japan.
Note that, the fact that our analysis targets indices based on information on constituent stocks as of a single point of time makes it impossible to capture the effects of regular rebalancing, which is generally performed in index calculations. Therefore, this analysis is a backward-looking analysis of the case in which investments were made in stocks with high ESG ratings at the time the constituent stock information was obtained.
The notches of MSCI ESG ratings are “AAA”, “AA”, “A”, “BBB”, “BB”, “B”, and “CCC”.
MSCI utilize the Global Industry Classification Standard (GICS) classification system as the sector classification.
We obtained all risk factors for the FF5 model from the Kenneth R. French data library. See “https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html#International”.
We obtained the data from Nikkei NEEDS FinancialQUEST.
We obtained the data of the number of new cases from Our World in Data (See: https://ourworldindata.org/).
All indicators are obtained from \({1.2\times 10}^{5}\) sampling results for each parameter, excluding the first \(1.2\times {10}^{4}\) results for the burn-in period. See Appendix A for the estimation procedure.
An absolute value of CD of 1.96 or less indicates the estimate by the MCMC method performed without any statistically significant problems at 5% level. Note that the MCMC method is a general term for sampling method using values that have been sampled once before.
See Appendix C for the computation of the marginal likelihood \({f}_{Y}\left({Y}_{n}\right)\).
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We would like to thank Editage (www.editage.com) for English language editing.
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This research is supported by the Japan Society for the Promotion of Science, Grant-in-Aid for Scientific Research (C) 22K01423.
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Saito, A., Tanizaki, H. Volatility and returns of ESG indices: evidence from Japan. SN Bus Econ 4, 34 (2024). https://doi.org/10.1007/s43546-024-00627-4
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DOI: https://doi.org/10.1007/s43546-024-00627-4