Financial network communities and methodological insights: a case study for Borsa Istanbul Sustainability Index

Abstract

This study investigates the influence of Environmental, Social, and Governance (ESG) scores on the clustering and community formation of companies within various network models. Using daily closing prices of 78 companies operating in the Borsa Istanbul Sustainability Index, we constructed correlation, mutual information (both continuous and discrete), and causality (both linear and nonlinear) networks to analyse intercompany relationships. We performed community detection using the Leading Eigenvector and Girvan–Newman methods, which revealed that companies within the same sector, particularly in the financial and manufacturing sectors, tend to form tight-knit communities. These intra-sectoral clusters reflect strong market behaviour correlations driven by sector-specific factors. Additionally, mixed-sector communities highlighted the presence of significant inter-sector dependencies. To assess the impact of ESG scores on these communities, nonparametric tests such as the Kruskal–Wallis, Conover, and log-rank were applied. Results showed that specific ESG factors, including emission, CSR strategy, innovation, and human rights, significantly influenced community formation. For instance, companies with strong performance in emission reduction and CSR strategies were found to form more cohesive communities, emphasizing the role of sustainability in shaping financial networks. Study findings underscore the critical role of ESG factors in financial market dynamics, promoting sustainable investment practices by highlighting the importance of integrating ESG considerations into investment decisions. These results suggest that sustainability metrics not only affect individual company performance but also contribute to the formation of interconnected communities with shared sustainability practices.