Environmental, Social, and Governance (ESG) Investing Risk and Return Analysis of Egyptian Sustainable Equity Index

Abstract

The present paper aims to compare risk and return characteristics of ESG index with those of conventional benchmark market index: EGX30 for a period from June 2007 to September 2020. We apply GARCH models not only to examine the volatility features of each index but also to investigate effect of exogenous shocks to stock market including global financial crisis in 2008 (GFC), political uncertainty after Egyptian revolution in 2011 (ER2011) and most recently potential effects of covid-19 pandemic. The results reveal that the daily compounded returns of the ESG Index are not statistically different from those of the EGX30 index, however, annualized returns of the ESG Index have been better than the returns of the EGX30 index. Interestingly, the annualized returns of ESG index outperform those of EGX30 index during the exogenous shock periods. Conversely, the ESG returns tend to underperform EGX30 returns during normal time periods, except the pre-Egyptian revolution period. We find that volatility of ESG index returns is more persistent than that of benchmark index, but the returns of benchmark index has larger leverage effect than those of ESG index. The findings have three important practical implications. Firstly, portfolio managers could follow ESG investing to diversify their portfolios and maximize returns. Secondly, firms listed in Egyptian exchange should adopt more environmental, social, governance issues in their policies to maximize firm value. Thirdly, asset pricing models could be extended to include ESG premium factor in explaining cross-sectional returns in the Egyptian exchange.