ESG index performance: European evidence

Abstract

ESG investing and its financial performance is nowadays a hot topic luring the attention of all economic agents. All developed financial markets offer sustainable indices to meet the ethical needs of investors. However, this is not the case for a large share of emerging financial markets. This study aims to analyze the financial performance of several MSCI European ESG indices and compare it to their respective conventional benchmarks. We investigate financial performance through time and also over different market conditions using both static and dynamic financial performance measures. The static analysis shows that the sustainable indices are as performant as the conventional index, in most cases. The Emerging Market (EM) Europe ESG Leaders index is less risky than the benchmark. However, the dynamic financial performance analysis reveals that CAPM alpha and beta are time-varying. The rolling window annual analysis shows that the EM Europe ESG Leaders index offers an interesting investment option since it beats the benchmark, less risky and offers the highest performance. Finally, the Markov-Switching analysis indicates that alphas and betas mainly depend on stock market conditions. Indeed, in high volatility market, risk-averse investors would be interested in investing in the ESG index since it reduces market risk. Moreover, when the market is more stable, the sustainable EM Europe ESG Leaders index offers better performance.