Environmental, social and governance (ESG) investing and Indian capital market indices: dynamic connectedness and risk management strategies

PurposeThe purpose of this study is to examine the dynamic connectedness and volatility spillovers between commodities and corporations exhibiting the best environmental, social and governance (ESG) practices. In addition, the authors determine the optimal hedge ratios and portfolio weights for ESG and commodity investors and portfolio managers.Design/methodology/approachThis study uses the novel frequency connectedness framework to point out volatility spillover between ESG indices covering the USA, developed and emerging markets and commodity indices, including energy (crude oil, natural gas and heating oil), industrial metals (aluminum, copper, zinc, nickel and lead) and precious metals (gold and silver) by using daily data between January 3, 2011 and May 26, 2021, covering significant socio-economic developments and the COVID-19 outbreak.FindingsThe results of this study suggest a total connectedness index at a mediocre level, mainly driven by the shocks creating uncertainty in the short term. And the results indicate that all ESG indices are net volatility transmitters, and all commodity indices other than crude oil and copper are net volatility receivers.Practical implicationsThe results imply statistically significant hedging and portfolio diversification opportunities to investors and portfolio managers across the asset classes, proven by the hedging effectiveness analyses.Social implicationsThis study provides implications for policymakers focusing on the risk of contagion among the commodity and ESG markets during turbulent periods to ensure international financial stability.Originality/valueThis study contributes to the existing literature by differentiating ESG portfolios as the USA, developed and developing markets and examining dynamic connectedness and volatility spillovers between ESG portfolios and commodities with a different technique. This study also contributes by considering COVID-19 outbreak.

In the context of a low-carbon economic transition and escalating uncertainties in financial markets, understanding the relationship between the long-term benefits of ESG (Environmental, Social, and Governance) investments and the stability of China’s financial markets emerges as a critical issue. This paper analyzes the risk contagion mechanisms within China’s financial system from the perspective of volatility spillovers associated with ESG investments. Initially, the study employs the Time-Varying Parameter Vector Autoregression (TVP-VAR) model to calculate the variance decomposition spillover index, contrasting the dynamics and risk transmission mechanisms of market volatility between portfolios composed of ESG and conventional stocks. Building upon the analysis of risk spillover relations among financial sub-markets, the study utilizes the generalized forecast error variance decomposition method to construct a complex network of financial system risk spillovers, investigating the risk contagion characteristics within both financial systems through network topology. Empirical findings indicate a significant reduction in the risk and net spillover effects of China’s financial system when ESG stock indices replace conventional stock indices, with a notable mutation in the volatility spillover network structure during extreme risk events and even more substantial changes during the COVID-19 pandemic. Furthermore, based on volatility spillover analysis, the study computes optimal weights and hedging strategies for portfolios incorporating the ESG volatility index and other market volatility indices. The conclusions of this research are instrumental for regulatory authorities in establishing early warning mechanisms and for investors in avoiding financial investment risks.

PurposeThis study aims to investigate the relationship between stock markets, environmental, social and governance (ESG) factors and Shariah-compliant in an integrated framework.Design/methodology/approachThe authors employ the multivariate factor stochastic volatility (mvFSV) framework to extract the volatility of the different sectoral indices. Based on this evidence, the authors employ the quantile vector autoregressive (QVAR) approach to examine the dynamic spillover connectedness among the aforementioned indices.FindingsThe study emphasizes the following major findings: (1) significant time-varying spillover connectedness across quantiles, (2) bidirectional and asymmetric spillover effect among the ESG index and the other sectoral indices, (3) the strength of spillover connectedness is time-varying across quantiles, (4) based on the perspective of portfolio optimization, ESG market is a significant strong forecasting contributor to conventional and Shariah-compliant markets, (5) overall, the findings point out serious quantile pass-through effect among ESG index and the other sectoral indices during the COVID-19 health crisis.Originality/valueThis study extends the previous literature in the following ways. First, to the best of the researchers’ knowledge, none of the existing studies have investigated the relationship between stock markets, ESG factors and Shariah-compliant in an integrated framework. Second, this study extends the previous scholarships by applying the mvFSV. Third, the authors propose a new rolling version to estimate dynamic spillovers, namely the rolling-window quantile VAR method. This approach provides a great advantage in computing the dynamics of return and variance spillover between variables in terms not only of the overall factor but also of the net (pairwise) aspect.

As companies, investors, and legislators realise how crucial it is to include Environmental, Social, and Governance (ESG) considerations in financial decision- making, the idea of sustainable finance has grown in popularity. In order to promote sustainable development, this review paper investigates how incorporating ESG factors can improve financial decision-making. The growth of ESG, its guiding principles, and its expanding impact on financial markets are all critically examined in this article. It outlines the main forces supporting ESG integration, including investor demand, business responsibility, and regulatory pressures, by examining recent research and industry practices. The study also emphasises how ESG considerations affect business transparency, long-term value development, and risk management. Issues with standardisation, data quality, and the dangers of greenwashing are among the difficulties that come with integrating ESG. This paper concludes by outlining recommendations for policymakers and financial institutions to enhance the integration of ESG factors, emphasising the need for improved regulatory frameworks, greater transparency, and consistent reporting standards. The study illustrates that although there is increasing agreement regarding the value of ESG in mitigating financial risks and contributing to sustainable economic growth, practical implementation remains inconsistent across industries and regions. The review also assesses various methodologies for evaluating ESG performance and how these are linked to financial returns, showing that well-implemented ESG strategies can result in competitive advantages and increased investor confidence. The results highlight the significance of sustainable finance as a driver for accomplishing more general environmental and social goals while preserving the long-term viability and financial success of enterprises. The report urges more work to remove current obstacles and promote a more uniform, internationally recognised method of incorporating ESG considerations into financial decision- making. Key Words: Sustainable Finance, ESG Integration, Financial Decision-Making, Risk Management, Sustainable Development, Investor Demand.

The rapid growth of the digital economy demands fundamental transformation in corporate governance (GCG), which no longer focuses solely on financial performance, but also on the integration of sustainability principles. Demands from investors and global stakeholders are encouraging companies in Indonesia to adopt an Environmental, Social, and Governance (ESG) framework as an integral part of their business strategy. Digital transformation plays a significant moderating role, where technologies such as the Internet of Things (IoT) and artificial intelligence (AI) can accelerate ESG implementation and improve risk management accuracy. However, the Financial Services Authority (OJK) has identified major challenges in its implementation, particularly the limited availability of competent human resources and reliable data, which risks reducing ESG reporting to a mere formality. This study aims to analyse the integration model between GCG and ESG principles in the context of Indonesia's digital economy, identify the role of digital transformation in strengthening the impact of ESG on company performance, and examine regulatory challenges and the role of the OJK in promoting substantive ESG implementation. This study uses a normative juridical method. The analysis focuses on relevant regulatory frameworks, such as OJK Regulation (POJK) No. 51/2017 on Sustainable Finance, as well as a conceptual approach to examining the synergy between GCG theory and ESG principles in the digital era. It was found that the synergy between ESG and GCG significantly improves reputation, resilience, and investor confidence. Digital technology has been proven to increase operational efficiency and risk mitigation in ESG management by 30-60%. The role of the board of directors is crucial in driving ESG performance. However, implementation in Indonesia is still top-down and oriented towards compliance with OJK regulations, while the internal capacity of companies, including human resources and data infrastructure, is not yet fully adequate. The convergence of the digital economy and ESG is shaping a new paradigm of techno-ethical governance. However, its success depends on addressing capacity challenges. It is recommended that regulators such as the OJK shift from merely requiring reporting to facilitating HR capacity building and data standardisation. Companies need to invest strategically in digital technology and talent development to ensure authentic and impactful ESG implementation.

PurposeThis study aims to analyse Moody’s use of sustainable finance keywords in over 24,000 rating action reports from 2012 to 2024. Prior to Moody’s 2019 acquisition of Vigeo Eiris (VE) – a specialist sustainable research firm – sustainable finance keywords were more closely associated with downgrades and conveyed a negative tone. Post-acquisition, the proportion of sustainable finance terminology increased, while its influence on rating outcomes diminished and conveyed a positive tone. These findings reflect broader systemic shifts driven by acquisitions, market forces and regulatory pressures, suggesting a normalization of sustainable finance factors in Moody’s credit evaluations and marking their shift from exceptional to routine considerations.Design/methodology/approachThe study analyses over 24,000 Moody’s rating action reports (2012–2024) to evaluate changes in the use of sustainable finance keywords before and after Moody’s 2019 acquisition of VE. Sentiment analysis and statistical tests identify a significant increase in the use of sustainability terms post-acquisition, reflecting normalization and diminished association with credit downgrades. Pre-acquisition, such terms conveyed heightened credit risk. Post-acquisition, they became routine, positively framed and less correlated with negative outcomes. The methodology includes textual analysis, sentiment scoring using the Loughran–McDonald dictionary, regression models, and Chow tests to assess structural breaks in keyword trends.FindingsThe study finds that Moody’s use of sustainable finance keywords increased significantly after its 2019 acquisition of VE, marking a shift toward routine integration of sustainability considerations. Pre-acquisition, such terms were rare, linked with downgrades and carried a negative tone, indicating heightened risk perceptions. Post-acquisition, keyword frequency rose, sentiment became less negative, and their association with downgrades diminished. This reflects a normalization of environmental, social and governance (ESG) factors in credit assessments, driven by Moody’s enhanced expertise, market trends and regulatory pressures. The findings highlight the evolving role of ESG in credit evaluations, influencing perceptions of credit risk and capital allocation.Practical implicationsThe study highlights the transformative role of strategic acquisitions in integrating ESG considerations into financial assessments. For credit rating agencies, it underscores the importance of aligning methodologies with evolving market demands and regulatory expectations. Policymakers can leverage these findings to promote standardized ESG reporting and encourage sustainable finance integration. Investors benefit from more nuanced credit assessments that incorporate ESG factors, enabling informed capital allocation aligned with sustainability goals. For corporations, the normalization of ESG considerations incentivizes improved sustainability practices to achieve favourable ratings, influencing access to capital and financial strategies while fostering a more resilient global financial system.Originality/valueThis study provides novel insights into how ESG considerations evolve within credit rating methodologies following strategic acquisitions. By analysing over 24,000 Moody’s reports, it is the first to demonstrate a significant shift in the frequency, sentiment and impact of sustainable finance keywords post-acquisition. Unlike prior research, which focuses on ESG’s quantitative effects, this study explores narrative changes, revealing how sustainability factors transitioned from exceptional risks to routine considerations. It highlights the broader systemic forces – acquisitions, market demands, and regulation – that drive ESG integration, offering valuable contributions to academic discourse, financial market practices and sustainable investment strategies.

This thesis explores the Impact of Sustainable Finance and ESG (Environmental, Social, and Governance) Analytics on contemporary business practices, financial decision-making, and long-term economic sustainability. As global economies grapple with climate change, inequality, and social accountability, the integration of ESG principles in investment and corporate governance has emerged as both a necessity and a competitive differentiator. The study examines the evolution of sustainable finance, key drivers behind ESG adoption, and the role of advanced analytics in ESG evaluation. Using secondary data from global sources such as the UNEP FI, World Bank, Bloomberg, McKinsey, and MSCI ESG Ratings, the research assesses ESG trends and performance outcomes across industries and geographies, particularly focusing on India’s growing ESG landscape. Findings suggest that companies with higher ESG scores tend to experience lower capital costs, better risk-adjusted returns, and stronger investor confidence. Furthermore, regulatory initiatives like SEBI’s BRSR (Business Responsibility and Sustainability Reporting) framework and EU Taxonomy are shaping ESG disclosures and sustainability-linked financing. The thesis concludes that ESG integration is not just a compliance measure but a value-creating strategy. For businesses, it offers insights into reputational risk management, operational efficiency, and stakeholder alignment. Recommendations include the need for harmonized ESG standards, greater transparency in ESG data, capacity-building among Indian firms, and the strategic use of analytics tools for predictive ESG performance.

Purpose With growing global emphasis on sustainability, environmental, social and governance (ESG) and corporate social responsibility (CSR) has become a key focus for businesses striving to balance profit with social and environmental responsibility. The purpose of this study is to analyze the publication trends, influential sources, authors and countries on ESG literature as well as highlighting future research themes and directions in ESG and CSR domain. Design/methodology/approach This study examined 783 documents published between 2008 and 2024 from two major databases including Scopus and Web of Science by using Biblioshiny (R Studio) and VOSviewer for thematic analysis and network cluster analysis, respectively. Findings The findings demonstrate significant growth in ESG and CSR research, with an upward publication metrics and citation rates. The highest numbers of publications are from developed countries such as USA, China and UK and key journals include Finance Research Letters and Journal of Sustainable Finance and Investment. The cluster analyses identified five key clusters: Transforming Responsible Investing into ESG Investment, Nexus of ESG Practices, Financial Outcomes and Stakeholder Engagement, Aligning ESG Practices with Technological Innovation, Governance and Ethics in Sustainability: CSR-Driven Reporting Practices and ESG Integration and Financial Sustainability. Originality/value This study delineates a comprehensive bibliometric analysis by using a unique diverse keyword search strategy to encompass various aspects of ESG literature and filling gaps in previous studies that relied on limited databases and search query.

Purpose This study aims to investigate the sectoral and thematic impacts of BSE indices on environmental, social and governance (ESG) returns, along with the volatility dynamics of ESG portfolios. It examines the tail behaviour of these indices and their conditional effects on ESG returns, particularly during periods of economic growth and downturn, showing asymmety and linearity. In addition, the study explores risk-return trade-offs, offering insights to optimise ESG portfolio performance. Design/methodology/approach The study uses a comprehensive series of daily data, combining BSE sectoral and thematic indices, to analyse their conditional impact on ESG returns, with quantile regression capturing both normal and tail behaviour. The GARCH-M model is applied to assess volatility dynamics and risk-return trade-offs, even under extreme market conditions. Findings The Carbonex, information technology (IT) and Energy indices significantly positively impact ESG returns, while the Commodity, Shariah and Greenex indices show no significant effect. The Shariah index strongly influences ESG returns only at extreme quantiles. In contrast, the BSE IT index is impactful during typical market conditions but not at the extremes. The Bharat-22 index consistently exhibits a negative impact, reducing portfolio volatility. In addition, strong evidence of diminishing volatility is found, with risk significantly affecting ESG returns. Practical implications The study implies that policymakers need to address the negative impact of the Bharat-22 index on ESG returns and the limited influence of the BSE-Greenex on ESG. For the industry, it offers guidance on constructing ESG-driven portfolios that maximise returns, with a focus on sector or theme-specific factors. Investors gain insights on diversifying ESG portfolios by incorporating Shariah and IT securities to reduce volatility, even during extreme market conditions. Originality/value The originality of this study lies in its exploration of the conditional impact of specific sectoral and thematic indices on ESG returns under both normal and extreme market conditions, exhibiting tail behaviour. It uniquely focuses on volatility patterns and risk-return trade-offs to optimise ESG returns across diverse market scenarios to enhance customer confidence towards green investments for the green economy.

PurposeThis research aims at synthesizing the existing body of literature on the role of environmental, social and governance (ESG) during the Covid-19 global pandemic, identifying the research agenda and perspectives on the role of ESG during times of economic turbulences and pointing to gaps and future research directions in this area.Design/methodology/approachA literature review of academic articles that focus on the role of ESG investments during the Covid-19 pandemic is conducted. These studies are identified based on searching/containing the keywords “ESG”, “Corporate Social Responsibility (CSR)”, “Sustainability” and “Sustainable Finance” in combination with one or more of the following terms: “Covid-19”, “Pandemic” “and Crisis”. Then, the authors explore the key directions/themes in these papers, and highlight the main gaps and areas that are evolving as future research opportunities.FindingsThe empirical findings provide overall compelling evidence in support of the role of ESG during times of crisis, especially when it comes to stock risk and volatility. For example, several studies report that ESG stocks are associated with superior stock performance (higher stock returns and firm value) during the pandemic, while other studies report that ESG act as a risk protection tool during times of crisis, as they document that ESG stocks are associated with lower volatility and lower downside risk during the Covid-19 crisis.Originality/valueTo the best of the authors knowledge, no review of the literature on the role that ESG plays during crises and pandemics has been conducted before. Thus, it fulfills this research gap in the literature.

PurposeThis paper systematically analyzes the literature on environmental, social and governance (ESG). It explores the antecedents, decisions and outcomes (ADO) influencing ESG investments; theories used in the literature; publication years, geographical locations and journals of publication of ESG-related articles; notable gaps in research on ESG investments; theoretical and managerial implications and prospective research avenues within the ESG field. All ESG components are interconnected with the United Nations’ Sustainable Development Goals (SDGs).Design/methodology/approachThe PRISMA framework was employed to screen articles from the Scopus database. A total of 386 articles spanning 2011–2024 were included. The search terms used to screen the articles for inclusion were “sustainable finance,” “ESG,” “environment, social, corporate governance,” “green finance,” “green bond,” “social bond,” “blue bond,” “social finance” and “corporate social responsibility.”FindingsThe findings indicate that organizations utilize green bonds, blue bonds and green loans to mitigate environmental concerns. To address social issues, companies issue social bonds and sustainable bonds and engage in socially responsible investing. To address concerns about corporate governance, companies emphasize corporate social responsibility and intellectual capital.Practical implicationsThe findings can be used to inform policymakers on the implementation of comprehensive regulatory frameworks in the realm of ESG. Tax benefits and subsidies should be extended to firms fostering ESG practices.Originality/valueThis study offers a comprehensive synthesis of the ESG literature by examining the ADO framework, which has not been systematically applied to ESG investments before. It integrates diverse components of ESG investments with the United Nations’ SDGs, providing a unique perspective on how these investments align with global sustainability objectives.

Purpose The aim of this paper is to evaluate the impact of the sustainable financial disclosure regulation (SFDR) on the environmental, social and governance (ESG) performance and risk scores of sustainable funds (SFs) from a multi-regional perspective. Design/methodology/approach This research involves conducting a comparative study between self-labeled SFs and conventional funds of the same mutual fund company matched using a five-step process. Using the SFDR publication as a natural study, this study uses panel data methodology on a portfolio ESG score database before SFDR implementation and three to six months post-SFDR Level 1 requirement to measure the impact. Findings The findings provide evidence of a clear reduction in ESG risk and an improvement in ESG performance across all samples and ESG dimensions following the SFDR regulation. In addition, the results reveal a positive spillover effect of the regulation on conventional funds following its implementation. Research limitations/implications The study can be helpful for fund managers, investors and regulators as it provides insights into the impact of mandatory ESG disclosure regulation on the global fund investment market. The study is limited by data availability due to the restrictive matching approach used, which starts with fund pairs from the same fund management company. Practical implications The study can be helpful for fund managers, investors and regulators as it provides insights into the impact of mandatory ESG disclosure regulation on the global fund investment market. Originality/value To the best of the authors’ knowledge, there is a lack of research papers that analyze the impact of the SFDR mandatory regulation as a driving force on the ESG scores of the fund market using the same fund management matched pair approach. This paper tests the importance of the investment area through a multi-regional approach to study potential “spillover” effects.

The application of environmental, social and governance (ESG) criteria has now become a more than essential requirement in the financial world. Therefore, it is necessary to understand, select and assess the risks of these ESG criteria and evaluate how they can impact a product or investment decision. Thus, the main objective of this article is to analyze ESG (Environmental, Social and Governance) indicators and their potential impacts in the framework of non-financial information. Current regulatory developments, such as the European Corporate Sustainability Reporting Directive (CSRD), are pushing to make ESG indicators (within this triple perspective: social, environmental and governance risks) a key set of information to be used for reporters and users of information. This article will study in further detail the main implications these regulations will have in how corporations will reflect social and ecological footprint information in their external reporting. Since these ESG indicators could have relevant financial impacts on the financial drivers of a corporation, stakeholders will be concerned on how enterprises are dealing with these ESG risks. Therefore, this ESG data will increase transparency and would mean a better understanding on how companies and investors have a sustainability compromise to evolve to a neutral carbon economy. In order to understand a company’s commitment with these ESG criteria, stakeholders would have to assess different aspects of the information reported. In this sense, this article will focus on how credit rating agencies incorporate these risks in their assessments. Credit rating agencies are becoming important actors in the sustainability criteria, as they incorporate ESG risks in their assessments, transmitting the importance of these indicators to investors and to markets. This study will look into the different time horizons between financial profitability and sustainability indicators. Current tendency and huge demand of non-financial indicators do not have the same profoundness, framework and tradition as financial indicators. This could lead to a situation in which it would be necessary a period to adapt both worlds and make them join and connect together in a sense in which one need the other one.

PurposeAssessing the performance and stability of financial institutions is crucial for investors, regulators and stakeholders. The primary purpose of this study was to examine the economic resilience and sustainability performance of banks operating in Türkiye through their capital adequacy, asset quality, management quality, earnings, liquidity, and sensitivity to market risk (CAMELS) and environmental, social and governance (ESG) scores. The research examined whether there was a significant relationship between the CAMELS and ESG scores of the banks in the sample and how they affected each other.Design/methodology/approachThis study analyzed the relationship between the CAMELS and ESG scores of five public and private banks operating in Türkiye. The study used statistical techniques such as correlation, regression and descriptive statistics to analyze the relationship between the CAMELS and the ESG score clusters. The data in the research cover the period 2008–2022 and were obtained from open sources disclosed to the public by the banks.FindingsThe study found a statistically significant relationship between the financial institutions’ CAMELS and ESG scores. Banks with higher CAMELS scores had a better ESG performance; however, this relationship was not linear. Regression analysis allowed for the identification of factors that had a significant impact on ESG scores within the CAMELS framework. No effect was detected on earnings (E), one of the CAMELS elements in the “economic, environmental, and governance elements” section of the banks' ESG scores. Management quality (M) positively affected only governance (G). Additionally, it was determined that the banks’ environmental performance (ENV) positively affected their CAMELS score.Practical implicationsThe positive relationship between the CAMELS and ESG dimensions shows that financial sustainability is essential. The findings are expected to enrich the understanding of financial institutions’ resilience in the context of Türkiye, which constitutes the research sample. In addition, the inferences that can be made from this Turkish sample are essential for informing investment decisions, regulatory frameworks and broader stakeholder engagement in similar markets.Social implicationsAlthough a significant and positive relationship was established between ESG and CAMELS scores, a substantial and positive relationship only sometimes emerged when the sub-elements of the variables in question were examined. Investing in environmental initiatives helps companies build sustainable business models for the long term, paving the way for future profits and improved capital adequacy and liquidity. However, new regulations and practices related to environmental activities may introduce additional costs, necessitating changes to existing business processes.Originality/valueThis study provides important information regarding the interaction in financial institutions between financial stability assessed by CAMELS scores and sustainability performance measured by ESG scores. The findings show that institutions with robust economic fundamentals demonstrate better ESG performance. This indicates that there is a positive relationship between financial stability and responsible business practices. This information will help investors, regulators and stakeholders to make informed decisions about financial institutions, decisions that focus on sustainability. The results also suggest that it is necessary to use dynamic models and analytical tools to address the link between CAMELS and ESG.

The Impact of ESG Indicators on the Financial Stability of Companies