A0691
Title: Spillovers in Europe: The role of ESG
Authors: Karoline Bax - University of Trento (Italy)
Giovanni Bonaccolto - University of Enna Kore (Italy)
Sandra Paterlini - University of Trento (Italy) [presenting]
Abstract: The relationship between environmental, social and governance (ESG) information and systemic risk is explored, an increasingly important issue for 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. Extending the forecast error variance decomposition (FEVD) method with a double regularization on the underlying vector autoregressive (VAR) parameters and the covariance matrix of the VAR residuals, the curse of dimensionality within each estimation is addressed. This allows the examination of 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 from 2007-2022, it is empirically shown that the best and worst ESG performers have the largest impact on the financial system in normal times. However, companies with the best ESG ratings generated significant spillovers throughout the system during a crisis. 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.
