ESG INVESTING STRATEGY THROUGH COVID-19 TURMOIL: ETF-BASED COMPARATIVE ANALYSIS OF RISK-RETURN CORRESPONDENCE
ESG INVESTING STRATEGY THROUGH COVID-19 TURMOIL: ETF-BASED COMPARATIVE ANALYSIS OF RISK-RETURN CORRESPONDENCE

Summary/Abstract: This paper examines the risk-return correspondence of ESG investing strategy through turmoil induced by the COVID-19 pandemic. The ESG segment demonstrates growth in the attractiveness of investments, and the investigation of their risk-return characteristics is significant. The goal of this article is to present the results of our research devoted to two ETF groups passing through a pandemic. One group of ETFs corresponds to low-level ESGs (ESG score <2.5), and another to high-level ESGs (ESG score >7.5). A comparative analysis focuses on risk estimations before, during, and after shock. It applies three approaches to measuring risk and a specially constructed pair of indicators. Additionally, trading volume parameters are analyzed. The results indicate differences in passing through shock for the abovementioned groups. Before shock, the second group was slightly less risky. During shock, the first group demonstrated strong linear dependency between the deepness of the shock and recovery rate, unlike the second. After shock, the second group showed a sharper increase in risk. Moreover, it demonstrated a higher correlation inside the group and a correlation with S&P500 returns. These results also reveal that dependency risk changes from the diversification level of the ETF portfolio. A complex analysis of trading volume activity and the Cowles-Johns ratio indicated the essential difference between groups. The final results indicate that ETFs from the ESG score >7.5 group were more strongly affected by COVID-19 shock. This can be expressed by the more severe “jitters” of returns and trading after the shock. The obtained results can be applied in the practice of forming portfolio investment strategies.

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