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MUSTAFA HAKAN ERATALAY (Tartu Ülikool)
The impact of ESG ratings on the systemic risk contribution and exposure of European blue-chip companies
In this paper we explore if there is rewarding feedback from maintaining higher ESG ratings by reducing the systemic risk contribution and exposure of the firms. For this purpose we analyze the systemic risk indicators of the constituent stocks of S&P 350 Europe for the period of January 2016 - October 2020, which also partly covers the Covid-19 period. We apply a VAR-MGARCH model to extract the partial correlations of the return shocks of these stocks. Afterwards, we calculate the systemic risk indicators by principal components approach. The systemic risk indicators depend on the volatility of a firm’s stock returns and also on the location of this firm in the stock network. Therefore, we construct the partial correlation network to extract eigenvector and closeness centralities. Systemic risk could also be related to a firm’s own financial risk, so we also consider firm level financial risk indicators, namely current ratios, profit margins and solvency ratios. Finally we consider the annual ESG ratings of the companies in the data set. We use fixed effects for our regressions. Our preliminary results indicate that (1) volatility of a stock’s returns and its centrality in the stock network are the main sources generating systemic risk, (2) higher ESG ratings reduce the systemic risk exposure and contribution to some extent, (3) Covid-19 augmented the partial effects of volatility, ESG ratings, centrality measures and financial risk ratios. When considering only the Covid-19 period, we found that social and governance factors have statistically significant impacts on systemic risk.