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.
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