Spillovers in Europe: The role of ESG
研究了ESG信息与系统性风险的关系，发现ESG表现最好和最差的公司对金融系统影响最大，危机时高ESG公司溢出效应显著。
This paper explores the relationship between environmental, social and governance (ESG) information and systemic risk, an increasingly important issue for both regulators and investors. While ESG ratings are widely used to assess a company’s non-financial performance, the impact of these factors on financial stability and systemic risk is still under debate. By extending the Forecast Error Variance Decomposition (FEVD) method with a double regularization on both the underlying vector autoregressive (VAR) parameters and the covariance matrix of the VAR residuals, we are able to address the curse of dimensionality within each estimation. This allows us to examine how vulnerable a company is and how much systemic impact a company has given its specific ESG. Looking at a larger sample of European stocks over the period 2007-2022, we empirically show that both the best and worst ESG performers have the largest impact on the financial system in normal times. However, during a crisis, companies with the best ESG ratings generate significant spillovers throughout the system. These findings highlight the importance of incorporating ESG factors into systemic risk assessments and monitoring companies’ ESG performance to ensure financial stability. Policymakers can benefit from this research by supporting investment in high ESG companies to mitigate relevant spillovers during stressed market conditions, when such companies are more interconnected.