Faculty of Economics and Management
Universiti Kebangsaan Malaysia
43600 UKM, Bangi Selangor, MALAYSIA
Fakulti Perniagaan dan Pengurusan
Universiti Sultan Zainal Abidin
Kampung Gong Badak, 21300, Terengganu, MALAYSIA
Abstract
This study provides comprehensive evaluation of the performance and interrelationships among six ESG stock market indices—Europe, Japan, UK, US, Emerging Markets, and Asia Pacific—over a nine-year span from October 2014 to May 2024. Employing performance metrics such as Jensen’s Alpha, Sharpe Ratio, and Treynor Ratio, the analysis reveals that while the Asia Pacific and US indices exhibit the strongest risk-adjusted performance, none of the indices achieve significantly positive Jensen’s Alpha, thereby challenging prevailing assumptions regarding ESG-driven outperformance. Using the MGARCH-DCC model, the study reveals notable volatility dynamics, with the US index exhibiting the highest persistence of volatility and the UK index demonstrating the most stable returns. The analysis also highlights persistently high correlations among the indices, even during the COVID-19 pandemic, contradicting prior studies that presented ESG stocks as effective safe havens during crises. This finding highlights the growing interconnectedness of global markets, which restricts diversification opportunities and emphasises the importance of identifying less correlated assets. Notably, the lower correlations associated with Japan indicate potential diversification benefits. By addressing gaps in existing literature, this study provides valuable insights into the dynamic behaviour of ESG indices, and their implications for sustainable investing. The findings have practical implications for investors seeking to optimise portfolio diversification, policymakers promoting sustainable finance, and corporate leaders integrating ESG considerations into strategic decision-making.