Do ESG indices offer resilience to geopolitical shocks? Evidence from contagion between DAX and emerging markets during the Russia-Ukraine War

Abstract

The rapid growth of environmental, social, and governance (ESG) investment products, perceived as representing responsible businesses, has made it imperative for investors to assess their effectiveness in insulating portfolios from geopolitical shocks. The current study investigates the resilience of ESG indices across ten emerging markets and their traditional counterparts versus DAX, during the Russia-Ukraine crisis, a quintessential case of geopolitical risk. Employing a DCC-GARCH framework and a time-varying spillover approach, we identify dynamic correlations and contagion effects between the DAX (transmitter market) and country-specific ESG and traditional indices. Interestingly, the results reveal a stronger contagion between the DAX and ESG indices, which can be attributed to a similar sectoral composition of ESG indices and their traditional counterparts. These results contribute to the identification and understanding of a significant gap between the intended objective and realized outcome of ESG investing. This warrants further investigation by academics, practitioners, and policymakers into how these indices are researched, used, and evaluated as vehicles for formulating a more substantive pure ESG investment strategy, rather than a predominantly rules-based one.