ESG, Risk, and (Tail) Dependence

Bax, Karoline; Şahin, Özge Uysal; Czado, Claudia; Paterlini, Sandra

doi:10.2139/ssrn.3846739

Cited by 7 publications

(9 citation statements)

References 64 publications

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“…Until now, most scholars have focused on the link between ESG scores and corporate financial performance (e.g., Friede et al (2015); Cornett et al (2016); Henke (2016); El Ghoul et al (2017); Hou et al (2019); Behl et al (2021); Kalaitzoglou et al (2021)). Then recently, some studies have started to analyze the link between ESG scores and risk measures (e.g., Shafer et al (2020); Bax et al (2021); Giese et al (2021); Maiti (2021)). Additionally, ESG data quality issues and the impact of ESG‐type corporate disclosures on investment allocations have been another center of attention in the ESG literature and which is where our work contributes.…”

Section: Literature Reviewmentioning

confidence: 99%

Environmental, Social, Governance scores and the Missing pillar—Why does missing information matter?

Şahin

Bax

Czado

et al. 2022

Corp Soc Responsibility Env

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Environmental, Social, and Governance (ESG) scores measure companies' performance concerning sustainability and are organized in three pillars: Environmental, Social, and Governance. These complementary non‐financial ESG scores should provide information about companies' ESG performance and risks. However, the extent of not yet published ESG information makes the reliability of ESG scores questionable. To explicitly capture the not yet published information on ESG category scores, a new pillar, the so‐called Missing (M) pillar, is proposed and added to the new definition of the Environmental, Social, Governance, and Missing (ESGM) scores. By relying on the data provided by Refinitiv, we show that the ESGM scores strengthen the companies' risk relationship. These new scores could benefit investors and practitioners as ESG exclusion strategies using only ESG scores might exclude assets with a low score solely because of their missing information and not necessarily because of a low ESG merit.

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Section: Literature Reviewmentioning

confidence: 99%

Environmental, Social, Governance scores and the Missing pillar—Why does missing information matter?

Şahin

Bax

Czado

et al. 2022

Corp Soc Responsibility Env

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“…Hence, for two assets in the same sector with the same ESG scores but a different number of missing values, we conclude that the company with the highest number of missing values has more potential to increase its ESG score due to the disclosure of new information, which would then replace zero values. In addition, we know from Figure 2, missing values are negatively related to the ESG rating class, and there has also been a trend for improving ESG scores over time (see Figure 4 in Bax et al (2021)). Next, we incorporate the M-pillar into the ESG scoring scheme and build new ESG scores: ESGM: Environmental, Social, Governance, Missing scores.…”

Section: Esgm Scores: Introducing the Missing (M-) Pillarmentioning

confidence: 96%

“…While most work so far has focused on the link between ESG scores and corporate financial performance (e.g., Friede et al (2015)), not much research has yet focused on the relationship between ESG scores and risk. Recently, Bax et al (2021) have shown, using vine copula models, that ESG scores exhibit around 30% a (tail) dependence relationship with the Value-at-Risk (VaR) risk measure. Other scholars find that better ESG ratings can be linked to lower downside risk and also reduce perceived tail risk (e.g., Shafer & Szado (2020); Giese et al (2021); Lööf et al (2021)).…”

Section: Introductionmentioning

confidence: 99%

Environmental, Social, Governance scores and the Missing pillar -- Why does missing information matter?

Sahin,

Bax,

Czado

et al. 2021

Preprint

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Environmental, social, and governance (ESG) scores measure companies' activities concerning sustainability and societal impact and are organized on three pillars: Environmental (E-), Social (S-), and Governance (G-). Different approaches have been proposed to compute ESG scores for companies, which typically rely on the aggregation of many and different sources of information. These complementary non-financial ESG scores should provide information about the ESG performance and risks of different companies. However, the extent of missing information makes the reliability of ESG scores questionable. To account for the missing information in the underlying ESG pillars, we introduce a new pillar, the so-called Missing (M-) pillar, and propose an optimization approach to compute new ESG (ESGM) scores, which should also be related to the company riskiness. As a result, the ESGM scores allow for incorporating the extent of missing information and establishing some meaningful relationship with respect to the riskiness of the companies under consideration. Interesting insights into the current limitations of ESG scoring methodology are discussed.

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“…While the ESG literature is dominated by various analyses on the relationship between ESG scores and financial performance or risk measures, the number of works combining vine copulas and ESG scores has increased too. These include but are not limited to Bax et al (2021), 11 who used vine copulas to introduce new risk measures to assess if companies with similar ESG scores share similar risk characteristics. Further, Lӧӧf et al (2022).…”

Section: Introductionmentioning

confidence: 99%

“…This is no longer a decomposition but a construction, where the dependence on x 2 in c 13;2 (F 1|2 (x 1 |x 2 ), F 3|2 (x 3 |x 2 ); θ 13;2 ) is solely captured by the arguments. If the margins in Equation (11) are uniform (i.e., f j = 1), we have a three-dimensional parametric copula density.…”

Section: Introduction To Vine Copula Modelsmentioning

confidence: 99%