Return and Risk Spillovers between ESG Global Index and Stock Markets: Evidence from Time and Frequency Analysis

In this paper, we examine the comovements between stock market returns and investments that take into account Environmental, Social, and Governance (ESG) factors by studying interconnections between the two returns in time and frequency space. We study interdependencies between the conventional stock market and ESG stocks using daily data from 2007 – 2021 for a set of 19 developing and 19 developed countries. Our results show significant comovement patterns between ESG returns and stock returns at various frequencies, time scales, and various sample episodes in all countries, particularly over financial turmoil episodes. For the most part, we document positive (in-phase) comovements between the stock returns and ESG returns in developing countries and negative (out-of-phase) comovements in developed countries. This implies limited portfolio gains from adding ESG stocks to portfolio diversification in developing countries but significant gains in developed countries.