Abstract
Socially responsible investing (SRI) or sustainable, responsible, and impact investing is growing fast. The net total of SRI assets at the beginning of 2018 was USD 12.0 trillion. There is extensive literature on SRI, but very little of it relates to portfolio construction and risk management combining SRI and commodities. In this paper, the authors pay attention to model volatility and dynamic conditional correlations between SRI investment and selected representative of commodities. We state the following hypothesis: the potential to create portfolio and risk management opportunities exists between SRI and commodities such as grain, precious metals, and industrial metals. To verify this, modeling of volatility and dynamic conditional correlation (DCC) between pair of elements is necessary. Empirical research conducted for the global market based on selected indices for SRI and commodities confirms this hypothesis. These results can improve asset selection in portfolio construction and allow investors to make more reasonable decisions.
Highlights
Responsible investing (SRI) has become increasingly popular over the past decade
Results of the copula–dynamic conditional correlation (DCC)–GARCH (Gaussian distribution) in Table 4 are similar to DCC–GARCH
This study focused on the modeling of volatility and conditional correlation in order to find opportunities of risk reduction in the case of socially responsible investing
Summary
Responsible investing (SRI) has become increasingly popular over the past decade. Social, and governance (ESG) factors across USD 12 trillion worth of professionally managed assets. Compared to value of USD 639 billion in 1995 (when the US SIF Foundation first measured the size of the US sustainable and responsible investment universe), these assets have increased more than 18-times with a compound annual growth rate of 13.6 percent [1]. Responsible investing started to grow during the 1960s among the rising concerns about equality and the ongoing war. The selection of SRI assets may occur either through positive or negative screening [3]. Negative screening excludes controversial sectors (e.g., coal mining, alcohol, tobacco, gambling, military)
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