Abstract:

The pandemic highlighted social and global inequality and spiked interests in Environmental, Social and Governance (ESG) investing. ESG assets reached $35.3 trillion in 2020 from around $30.7 trillion in 2018 and $22.8 trillion in 2016 reaching a third of current total global assets under management, according to the Global Sustainable Investment Association (http://www.gsi-alliance.org/). This paper investigates the possibilities of portfolio construction including companies with the high ESG scores. Two groups of financial investments will be considered – approximated by ESG and conventional stock indices. It is known that correlation between ESG and conventional stock indices is high. It means benefits from diversification in case of portfolio containing these two assets should disappear. GARCH models and Dynamic Conditional Correlation approach are applied in this study. Investigation of changing volatility and dynamic dependence shows periods with diversification opportunities, which means that even high correlation between assets, active investment strategy for portfolio is possible.