Abstract:
This paper explores the potential diversification benefits of socially responsible investments
for conventional stock portfolios by examining the risk spillovers and dynamic correlations between
conventional and sustainability stock indexes from a number of regions. We observe significant
unidirectional volatility transmissions from conventional to sustainable equities, suggesting that
the criteria applied for socially responsible investments do not necessarily shield these securities
from common market shocks. While significant dynamic correlations are observed between
sustainable and conventional stocks, particularly in Europe, the analysis of both in- and out-of-sample
dynamic portfolios suggests that supplementing conventional stock portfolios with sustainable
counterparts improves the risk/return profile of stock portfolios in all regions. The findings overall
suggest that sustainable investments can indeed provide diversification gains for conventional stock
portfolios globally.
