ESG INVESTING STRATEGY THROUGH COVID-19 TURMOIL: ETF-BASED COMPARATIVE ANALYSIS OF RISK-RETURN CORRESPONDENCE

Abstract

This paper examines the risk-return correspondence of ESG investing strategy
through turmoil induced by the COVID-19 pandemic. The ESG segment demonstrates growth
in the attractiveness of investments, and the investigation of their risk-return characteristics is
significant. The goal of this article is to present the results of our research devoted to two ETF
groups passing through a pandemic. One group of ETFs corresponds to low-level ESGs (ESG
score <2.5), and another to high-level ESGs (ESG score >7.5). A comparative analysis focuses
on risk estimations before, during, and after shock. It applies three approaches to measuring
risk and a specially constructed pair of indicators. Additionally, trading volume parameters
are analyzed. The results indicate differences in passing through shock for the abovementioned
groups. Before shock, the second group was slightly less risky. During shock, the first group
demonstrated strong linear dependency between the deepness of the shock and recovery rate,
unlike the second. After shock, the second group showed a sharper increase in risk. Moreover,
it demonstrated a higher correlation inside the group and a correlation with S&P500 returns.
These results also reveal that dependency risk changes from the diversification level of the ETF
portfolio. A complex analysis of trading volume activity and the Cowles-Johns ratio indicated
the essential difference between groups. The final results indicate that ETFs from the ESG score
>7.5 group were more strongly affected by COVID-19 shock. This can be expressed by the more
severe “jitters” of returns and trading after the shock. The obtained results can be applied in the
practice of forming portfolio investment strategies.