Sustainability 15 07183 v3

sustainability
Article
The Impact of ESG Scores on Risk Market Performance
Luigi Aldieri *,† , Alessandra Amendola † and Vincenzo Candila †
Department of Economics and Statistics, University of Salerno, 84084 Fisciano, Italy; [email protected] (A.A.);
[email protected] (V.C.)
* Correspondence: [email protected]
† These authors contributed equally to this work.
Abstract: Over the last two decades, there has been an increased attention to and awareness of
corporate environmental, social, and governance (ESG) responsibilities. The asset allocation process
has changed accordingly to consider these ESG responsibilities, and it has largely been recognized
that private and institutional investors are sensitive to ESG factors when deciding on firms in which
to invest. In addition to ESG factors, other key stock-related factors to which investors generally pay
attention are risk-adjusted indicators, such as the Sharpe ratio (SR) and the Sortino index (SI), as
well as tail risk measures, such as the Value-at-Risk (VaR) and the Expected Shortfall (ES). Overall,
the SR, SI, VaR, and ES can provide a guide for investors concerning the risk market performance
of a stock under investigation. In this context, the research question that arises is the following: are
firms’ performances sensitive to ESG rates? The present contribution aims to answer this question.
In particular, the SR, SI, VaR, and ES measures of a set of listed firms are calculated and evaluated.
Among these, there are firms with low ESG grades and some with high ESG grades according to two
ESG rate providers. The list of stocks under consideration consists of the first 25 constituents (by
weight) of the S&P500 index in the period from 2020 and 2022. The empirical findings indicate that
risk market performance does not properly depend on high or low ESG rates.
Keywords: ESG rating; investments; stock returns; Value-at-Risk; Expected Shortfall
1. Introduction
Citation: Aldieri, L.; Amendola, A.; Empirical research concerning the impact of environmental, social, and governance
Candila, V. The Impact of ESG Scores (ESG) factors on firms’ performance has largely been assessed in the business and economic
on Risk Market Performance. literature [1–3] because it helps institutional investors to identify, measure, and manage
Sustainability 2023, 15, 7183. https:// investment risks and opportunities arising from significant ESG issues [4]. Investors and
doi.org/10.3390/su15097183 policymakers involved in socially responsible investment have drastically increased in
Academic Editor: David K. Ding recent years [5], thus raising the attention given to ESG issues and their influence on the
profitability [6] and financial viability of firms. Corporate managers and policymakers have
Received: 12 February 2023 traditionally relied on two sets of information: fundamental corporate information and
Revised: 18 April 2023
technical information provided by the stock market. Indeed, ESG information represents
Accepted: 22 April 2023
an extra set of data that can also provide insight into future performance and can support
Published: 25 April 2023
investors in making sound investment decisions [4]. An expanding body of research has
focused on the investigation of ESG measures and ranking methodologies [7], as well as
the evaluation of the impacts of ESG factors on financial performance and risk manage-
Copyright: © 2023 by the authors.
ment [8,9]. Many studies have tried to summarize the different results [10] and others have
Licensee MDPI, Basel, Switzerland. analyzed the impact of ESG factors on the performance of information technology [11].
This article is an open access article Usually, the objective of scientific studies is to use ESG tools to achieve financial results
distributed under the terms and in portfolio management. The findings from over 1000 research reports were that the
conditions of the Creative Commons correlation between ESG features and financial performance was not conclusive. Indeed,
Attribution (CC BY) license (https:// the related literature shows positive, negative, and nonsignificant links, even though most
creativecommons.org/licenses/by/ of the studies present a significant positive correlation [4]. The lack of clear evidence
4.0/). in favor of ESG-related funds’ performance can be due to both the outperformance and
Sustainability 2023, 15, 7183. https://doi.org/10.3390/su15097183 https://www.mdpi.com/journal/sustainability

Sustainability 2023, 15, 7183 2 of 16
underperformance of ESG investing [12]. For this reason, there is still room for the question
of how and to what extent ESG criteria impact risk market performance. A general tool for
assessing the risk market performance of a stock is looking at its risk-adjusted indicators
and the occurrences of unfortunate events when the stock returns are extremely low. These
events have a low probability of happening, but when they occur, the consequences are
generally severe. From the risk management perspective, the interest is, therefore, in the
capital that a market participant should hold as a buffer against unexpected future losses.
The Basel–I, Basel–II, and Basel–III agreements [13] set these minimum capital requirements.
Two of the most popular tail risk measures suggested by the Basel agreements are the Value-
at-Risk (VaR) and Expected Shortfall (ES). Nowadays, verifying the adequacy of such
risk measures is crucial not only for meeting the challenges of the Basel agreements, but
also for providing popular benchmarks for managing financial risk. The VaR, which was
introduced by J.P. Morgan in their RiskMetrics publication [14], is defined as the maximum
loss that is likely to occur at a fixed confidence interval and over a specified period. More
importantly, the VaR represents one of the most widespread risk measures. The ES is de-
fined as the expected loss that occurs when the returns are beyond the VaR. Unlike the VaR
measure, the ES has some desirable properties, such as coherence [15,16]. The VaR and ES
provide the most popular benchmarks from the perspective of risk management [17,18]. In
this framework, an issue that has remained unexplored in the literature is the relationship
between ESG rates and risk market performance. Therefore, our research question is the
following: Is the listed firms’ performance—in terms of risk-adjusted indicators and the
adequacy of the VaR and ES—sensitive to ESG rates? In other words, do listed firms with
high ESG rates perform better in terms of risk market performance than firms with low
ESG rates? The present paper aims to answer this question.
This paper is organized as follows. Section 2 reviews the main literature concerning
ESG responsibilities. Section 3 introduces the theoretical research questions; it describes the
method and the data used for the empirical investigation. Section 4 presents the results
that were reached, and they are further discussed in Section 5, which also highlights the
weaknesses of the analysis and suggests insights for further research.
2. Literature Overview
Many countries have developed a common framework for using ESG metrics for
sustainable finance [19]. There are various studies that have explored the effects of ESG
factors on the portfolio selection process for the achievement of high sustainability. Van
Duuren et al. (2016) [20] examined the integration of ESG in the investment process. Their
results showed significant differences between American and European fund managers.
Sassen et al. (2016) [21] analyzed the impact of ESG factors on firm risk at the European
level. However, an important link between ESG disclosure and company performance
was identified in the literature [22]. As has been broadly discussed [23–25], the debate
concerning the nexus of ESG ratings and financial performance is still open. Fried et al.
(2015) [26] analyzed ESG investing relative to more than 2000 empirical works to show a
positive correlation between ESG and a company’s financial performance over time (see
also the works of [27,28] on the same topic). Many studies have confirmed this important
result [29–31]. In addition, Zhao et al. (2018) [32] found that high ESG scores in Chinese
firms could improve financial performance. Brogi and Lagasio (2019) [33] showed the
positive impact of ESG on American firms’ profitability. From the same perspective, Ortas
et al. (2015) [34] obtained the same finding for Spain, France, and Japan. Aureli et al.
(2020) [35] identified the importance of ESG disclosure for a firm’s market, while Giese
et al. (2019) [5] explored how reduced capital costs, higher valuations, high profitability,
and a lower exposure to tail risk could be opportune channels for positively affecting firms’
valuation and their financial performance. However, a conclusion about ESG ratings and
financial performance has not been attained. There is still room for other findings. Indeed,
some works did not observe a clear statistical impact [36], while some other contributions
highlighted very weak effects [37]. Because of the different methodologies adopted in
these investigations relative to the different countries in which they were performed, it is
hard to perform a robust interpretation of the findings. Regarding the performance of ESG
portfolios, empirical studies have confirmed that investing in ESG-firm-based portfolios
can generate good performance [38–40]. Yen et al. (2019) [41] demonstrated that socially
responsible investment portfolios achieved a high performance in Japan, thus confirming
the results of other studies [42]. Further studies analyzed the interaction between ESG and
green innovation to assess the final impact on a company’s value and documented that
green innovation and ESG could generate positive value [43]. Finally, the impact of ESG
elements on credit rankings has been evaluated in the literature. Attig et al. (2013) [44]
showed that companies with a high social performance could benefit from good ratings. In
the same direction, Devalle et al. (2017) [45] and Weber et al. (2010) [46] confirmed that
companies with a relevant performance in terms of the environment and sustainability
could benefit from credit rates. Bhattacharya and Sharma (2019) [47] found a positive
effect on credit rankings but only for small and middle-level firms. Table 1 summarizes the
contents of the literature review discussion.
The previous discussion about the different strands in the literature leads to the
conclusion that it is difficult to confirm ESG responsibilities’ relevance. Thus, there is a
necessity for further empirical research to investigate opportune actions when coping with
ESG issues and sustainable finance.
Table 1. Literature Overview.
Title Authors
Estimation risk in financial risk management. Christoffersen and Goncalves (2005) [18]
The environmental, social, governance, and fi-
nancial performance effects on companies that Ortas et al. (2015) [34]
adopt the United Nations Global Compact.
Impact of ESG factors on firm risk in Europe. Sassen et al. (2016) [21]
Does ESG performance have an impact on fi-
Velte (2017) [28]
nancial performance? Evidence from Germany.
Foundations of ESG investing: How ESG affects
Giese et al. (2019) [5]
equity valuation, risk and performance.
The impact of environmental, social, and gov-
ernance performance on stock prices: Evidence Miralles et al. (2019) [37]
from the banking industry.
The Interaction Effect between ESG and Green
Innovation and Its Impact on Firm Value from Zhang et al. (2020) [43]
the Perspective of Information Disclosure.
ESG screening strategies and portfolio perfor-
mance: How do they fare in periods of financial Torricelli and Bertelli (2022) [9]
distress?
Impact of ESG performance on firm value and
Aydoğmuş et al. (2022) [6]
profitability.
A Systematic Literature Review on ESG during
Savio et al. (2023) [48]
the COVID-19 Pandemic.
3. Risk-Adjusted Indicators and Tail Risk Measures

To explore the implications for risk performance related to the incorporation of ESG in-
formation into investment strategies, an analysis based on different risk-adjusted indicators
and tail risk measures was carried out.
We start by presenting two risk-adjusted indicators: the widely used Sharpe ratio (SR),
which was developed by [49], and the Sortino ratio [50]. The SR index compares the return
of an investment with its risk and is calculated as the ratio of the total return differential
versus a benchmark, such as the risk-free rate of return, and its standard deviation:
Rp − R f
SR = (1)
σp
where
• R p is the expected return of the investment under consideration;
• R f is the risk-free rate of return;
• σp is the standard deviation of returns of the investment under consideration.
A higher value of the SR indicates that the security has superior performance.
The Sortino index (SI) is a modification of the SR and measures the risk-adjusted
return of an asset by using the target rate of return. The SI uses the downside deviation
rather than the standard deviation in the denominator, and it is calculated by dividing the
difference between an asset’s return and risk-free rate by the standard deviation of negative
returns (returns falling below a user-specified target).
Rp − R f
SI = (2)
σD
where
• R p is the expected return;
• R f is the risk-free rate of return;
• σD is the standard deviation of the downside.
Ideally, a high SI is preferred, as this indicates that an investor will earn a higher return
for each unit of downside risk. Analysts commonly prefer to use the SR index to evaluate
low-volatility investment portfolios and the SI to evaluate high-volatility portfolios.
The VaRt,τ at time t and at level τ is defined as the worst return to be expected at a
probability of 1 − τ over a specific horizon [51]. Formally,
Pr (rt < VaRt,τ |Ft−1 ) = τ,
where rt is the one-period return from time t − 1 to time t, τ ∈ (0, 1) is the quantile level,
and Ft is the information set at time t.
Despite its widespread use, the VaR measure has the limitation that it gives no infor-
mation regarding any possible loss beyond the given threshold value.
The ES is defined as the conditional expectation of returns when the VaR is violated
(exceedance beyond the VaR) [52,53], that is,
ESt,τ = E[rt |rt < VaRt,τ , Ft−1 ].

In this work, the VaR was estimated according to two different approaches: the
parametric and semiparametric approaches. In the parametric approach, the GARCH [54]
model was used to estimate the one-step-ahead conditional standard deviation σt . Then,
the VaR was obtained by multiplying the one-step-ahead conditional standard deviation σt
by the quantile of the hypothesized error distribution. In this work, we assumed a Gaussian
distribution. Formally,
VaRt,τ = σt Φ−1 (τ ),
where Φ−1 is the inverse cumulative density function of the standard Gaussian distribution.
The other model used here to calculate the VaR was the CAViaR model of Engle and
Manganelli (2004) [55], which belongs to the class of semiparametric methods because
it does not assume a specific parametric distribution of the returns, but it assumes an
updating formula for the VaR. The CAViaR model directly specifies the τth conditional
quantile of rt by using the following autoregressive process:
p q
VaRt,τ = β 0 (τ ) + ∑ β i (τ )VaRt−i,τ + ∑ α j (τ )`(xt− j ),
i =1 j =1
where `(·) is the news impact curve.

Different choices of `( xt− j ) are available. In this work, we referred to the CAViaR–
asymmetric slope (CAViaR-AS):
VaRt,τ = β 0 + β 1 VaRt−1,τ +
( β 2 I (rt−1 > 0) + β 3 I (rt−1 < 0)) | rt−1 |,
where I (·) is an indicator function.

The ES obtained from the parametric models with a Gaussian error distribution is:
φ(Φ−1 (τ ))
ESt (τ ) = −σt , (3)
τ
where φ(·) is the probability density function (PDF) of the standard Gaussian distribution.
Following [56], in the case of semiparametric models, the ES can be computed jointly
with the VaR by maximizing the following asymmetric Laplace density, that is,

1

τ−1 ( r t − VaR t ( τ )) τ − ( r t ≤ VaR t ( τ ))
f (rt | VaRt (τ ), τ ) = exp , (4)
ESt (τ ) τESt (τ )
where the ES in (4) is calculated as:
ESt (τ ) = (1 + exp(γES ))VaRt (τ ). (5)
Assessing the quality of the tail risk forecasts is the aim of the backtesting procedures
(see the reviews on this topic of [57,58], among others). In this work, next to the actual over
expected (AE) exceedance ratio as a common measure of goodness of fit, we employed four
different backtesting procedures to evaluate the tail risk forecasts:
• The unconditional coverage test (UC, Kupiec, 1995 [59]).
• The conditional coverage test (CC, Christoffersen, 1998 [60]).
• The dynamic quantile test (DQ, Engle and Manganelli, 2004 [55]) .
• The CC test of McNeil and Frey (2000) [61] for the ES (ES-CC).
The AE exceedance ratio is the number of times that the VaR has been violated over
the expected VaR violations. The closer this ratio is to one, the better the model producing
the VaR measures is. Moreover, if the AE is larger than one, the model has produced many
VaR violations (over those expected). Therefore, it underestimates the risk.
The UC test is a likelihood-ratio-based test, where the null hypothesis assesses whether
the actual frequency of VaR violations is equal to the chosen τ level. The CC test verifies
not only whether the observed frequency of violations is in line with the prefixed τ, but
also if these VaR violations are independently distributed over time. The DQ test always
verifies the independence of the VaR violations jointly with the correctness of the number
of violations—as in the CC test—but it was shown [62] to have more power over it. In
particular, the DQ test consists of running a linear regression in which the dependent
variable is the sequence of VaR violations and the covariates are the past violations and
possibly any other explanatory variables.
Similarly to the VaR violation tests, the ES-CC test of McNeil and Frey (2000) [61] is
based on the size of the discrepancy between the actual return and the estimated ES when
a VaR violation occurs. The null hypothesis of this test is that the mean of the standardized
exceedance residuals is i.i.d. and has zero mean, against the alternative hypothesis that the
ES is systematically underestimated.
4. Empirical Analysis
This analysis aims to investigate whether and how much the positive/negative ESG
screening of a firm is correctly recognized by the stock market in terms of risk-adjusted
indicators and the adequacy of tail risk measures. The analysis was performed on the daily
data of the first 25 constituents (by weight) of the S&P500 index at the time of writing this
text. The sample period went from 2020 to 2022.
Table 2 summarizes the last available ESG scores for each selected asset according to
the Eikon and Sustainalytics providers. The higher the Eikon score is, the lower the ESG
risk is, while the smaller the Sustainalytics score is, the lower the ESG score is. In particular,
the ESG grade by Eikon ranges between 0 (a poor score indicates a high ESG risk) and 100
(a good score indicates a low ESG risk). According to Eikon, the companies are ranked
from D− to A+. However, the ESG grade from Sustainalytics always ranges between 0
and 100, but this time, 100 indicates a high level of risk and 0 indicates the absence of
risk. According to Sustainalytics, the companies are ranked in five categories: negligible
(with a score of 0–10), low (with a score of 11–20), medium (with a score of 21–30), high
(with a score of 31–40), and severe (with a score larger than 40). It is worth noting that
there is no strong consensus about the ESG grades between the two providers used in
this work. To illustrate this point, we colored the cells of Table 2 to highlight the grade
of agreement/disagreement between Eikon and Sustainalytics. Therefore, green cells in
Table 2 indicate the homogeneity of high and medium scores (Apple, Mastercard, Microsoft,
NVIDIA, PepsiCo, Bank of America, Costco Wholesale, Eli Lilly, P&G, and Tesla), meaning
that the ESG scores provided by Eikon and Sustainalytics entirely or almost wholly agree
on the ESG grades. On the other side, orange and red cells in Table 2 indicate small and
large degrees of heterogeneity between Eikon and Sustainalytics.
Tables 3–8 are the key tables of our work. These tables report the risk-adjusted
indicators (SI and SR) and the adequacy of the tail risk measures (AE and the p-values of
the four backtesting tests, that is, UC, CC, DQ, and ES-CC) according to the two models
presented above (GARCH and AS-CAViaR), the sample period, and the ESG score provider.
In these tables, the shades of gray denote that the backtesting procedure in a column did
not pass at a significance level of α = 0.05. In Table 3, the tail risk measures were obtained
with the AS-CAViaR model, the sample period went from 2020 to November 2022, and
the assets were reported from the highest ESG risk (top of the table) to the lowest ESG
risk (bottom of the table) on the basis of the 2020 Eikon data. Surprisingly, both the SI
and SR, as well as the backtesting results, did not significantly change among the low-
and high-rated ESG firms. For instance, the firm with the highest ESG risk, Berkshire
Hathaway, had the same SI and SR indexes as the two top-rated (in terms of ESG risk)
firms, PepsiCo and Microsoft. More interestingly, all three of these firms largely passed
the backtesting procedures. To confirm our thesis that the stock market performance in
terms of risk-adjusted indicators and the tail risk measures’ adequacy was not affected
by the ESG rates of the firms under investigation, we repeated the analysis reported in
Table 3 with the GARCH model instead of AS-CAViaR. The results are illustrated in Table 4.
Though the SI and SR indexes did not change from Tables 3 and 4, in the latter table, we
noted that many firms did not pass the backtesting procedures. However, in line with
Table 3, the bad performance of these firms was uniformly distributed across low and high
ESG scores. Thus, we can conclude that the GARCH model was mainly responsible for
the failure of the backtesting procedures. These results were confirmed even when we
excluded the beginning of the COVID-19 pandemic from the analysis. In Tables 5 and 6, we
report, respectively, the analysis of the risk-adjusted indicators and the tail risk measures’
adequacy for AS-CAViaR and GARCH for the period from 2021 to November 2022 while
using Eikon as the ESG score provider. Both Tables 5 and 6 corroborate our thesis that the
ESG scores did not affect the stock market performance analyzed here. For instance, the
SI and SR indexes of the Meta Platform, a firm with a high ESG risk, were both negative.
However, Amazon, a firm with a low ESG risk according to Eikon, reported negative SI
and SR indexes for the same period. In terms of the tail risk measures’ adequacy, we again
noted that the AS-CAViaR model almost always allowed all of the firms—independently of
the ESG scores—to pass all of the backtesting procedures. As for the period from 2020 to
November 2022, the GARCH model did not always produce accurate tail risk measures,
but the failures were once more uniformly distributed among all of the firms (those with
both low and high ESG rates). Finally, similar results were achieved when the firms under
investigation were ranked according to the data from Sustainalytics. As illustrated in
Tables 7 and 8, the good and bad performance in terms of risk-adjusted indicators and the
tail risk measures’ adequacy did not depend on the ESG rates.
To summarize, we could not identify superior financial performance according to
higher ESG scores (in the cases of both the Eikon and Sustainalytics providers), and vice
versa. Therefore, the stock market performance regarding risk-adjusted indicators and the
adequacy of tail risk measures did not positively react to high ESG rankings. At the same
time, the stock market performance did not negatively respond to low ESG scores. This is
in line with results in the literature claiming that firms may react very differently to being
rated [63]. Indeed, corporate responses may also depend on managers’ beliefs regarding
the material benefits of adjusting to and scoring well on ESG ratings and their alignment
with corporate strategies [63].
Table 2. Assets and ESG ratings.
ESG—
ESG—Eikon: ESG—
Name Tick ESG—Eikon Sustainalytics:
Grade Sustainalytics
Grade
AbbVie ABBV 82.4 A− 29.7 Medium
Alphabet INC GOOG 81.87 A− 24.6 Medium
Amazon AMZN 86.75 A 30.3 High
Apple AAPL 79.49 A− 16.7 Low
Bank of America BAC 73.76 B+ 26.8 Medium
Berkshire Hathaway BRK-A 28.87 C− 40.1 Severe
Chevron CVX 86.55 A 38.8 High
Coca-Cola KO 78.58 A− 37.7 High
Costco Wholesale COST 72.61 B+ 24.2 Medium
Eli Lilly LLY 66.21 B 24.5 Medium
Exxon Mobil XOM 66.33 B 36.5 High
Home Depot HD 71.1 B+ 12.5 Low
J&J JNJ 88.35 A 24.4 Medium
JP Morgan Chase JPM 82.49 A− 29.3 Medium
Mastercard MA 75.65 A− 15.6 Low
Merck & Co MRK 82.1 A− 21.6 Medium
Meta Platform META 65.53 B 34.5 High
Microsoft MSFT 92.49 A 15.2 Low
NVIDIA NVDA 79.15 A− 13.6 Low
P&G PG 73.1 B+ 26.7 Medium
PepsiCo PEP 86.95 A 16.3 Low
Pfizer PFE 80.73 A− 25.2 Medium
Tesla TSLA 65.01 B 28.7 Medium
United Health UNH 73.75 B+ 17.4 Low
Visa Inc. V 54.37 B− 15.6 Low
Notes: This table reports the latest available ESG scores according to the Eikon and Sustainalytics providers. The
higher the Eikon score is, the lower the ESG risk is. The smaller the Sustainalytics score is, the lower the ESG risk
is. Green cells indicate scores’ homogeneity. Orange and red cells indicate small and large scores’ heterogeneity.
Table 3. Results for the period January 2020–November 2022; ESG data: 2020; provider: Eikon; model:
AS-CAViaR; τ = 0.05.
Name Tick ESG—Eikon ESG—Score: Grade SI SR AE UC CC DQ ES-CC

Berkshire Hathaway BRK-A 27.77 C− 0.04 0.03 0.98 0.91 0.98 0.97 0.84
Visa Inc. V 54.37 B− 0.01 0.01 0.98 0.91 0.8 0.64 0.6
Meta Platform META 62.72 B −0.04 −0.03 0.98 0.91 0.8 0.6 0.34
Tesla TSLA 63.10 B 0.08 0.06 0.98 0.91 0.15 0.03 0.74
Exxon Mobil XOM 66.33 B 0.05 0.03 1.01 0.96 0.77 0.5 0.81
Eli Lilly LLY 69.33 B 0.11 0.07 1.01 0.96 0.72 0.75 0.75
Costco Wholesale COST 72.61 B+ 0.07 0.05 0.98 0.91 0.67 0.7 0.67
Mastercard MA 72.67 B+ 0.01 0.01 1.01 0.96 0.77 0.78 0.79
Home Depot HD 72.98 B+ 0.04 0.03 0.98 0.91 0.8 0.99 0.42
P&G PG 73.10 B+ 0.03 0.02 0.98 0.91 0.8 0.82 0.66
United Health UNH 73.75 B+ 0.06 0.04 1.12 0.47 0.07 0.00 0.8
Apple AAPL 76.74 A− 0.05 0.04 1.01 0.96 0.14 0.42 0.93
Alphabet INC GOOG 77.78 A− 0.03 0.02 0.98 0.91 0.8 0.98 0.66
Coca-Cola KO 77.94 A− 0.02 0.02 0.98 0.91 0.8 0.77 0.58
NVIDIA NVDA 79.11 A− 0.05 0.04 0.98 0.91 0.8 0.93 0.86
Pfizer PFE 80.73 A− 0.04 0.03 0.98 0.91 0.1 0.25 0.79
AbbVie ABBV 81.40 A− 0.08 0.06 1.01 0.96 0.14 0.25 0.69
Bank of America BAC 81.53 A− 0.01 0.01 0.98 0.91 0.67 0.77 0.41
Merck & Co MRK 82.10 A− 0.04 0.03 1.01 0.96 0.77 0.9 0.52
Chevron CVX 83.90 A 0.04 0.03 0.98 0.91 0.8 0.73 0.31
JP Morgan Chase JPM 84.49 A 0.00 0.00 0.98 0.91 0.98 0.48 0.31
J&J JNJ 86.11 A 0.04 0.03 0.98 0.91 0.8 0.67 0.71
Amazon AMZN 86.75 A −0.00 −0.00 0.98 0.91 0.8 0.93 0.46
PepsiCo PEP 89.71 A 0.04 0.03 1.01 0.96 0.77 0.78 0.68
Microsoft MSFT 93.52 A+ 0.04 0.03 1.01 0.96 0.14 0.48 0.73
Notes: Column SI denotes the Sortino index based on the average excess return over the downside risk, and SR
is the Sharpe ratio calculated as the ratio of the asset’s mean excess return and its standard deviation. Column AE
denotes the actual over expected exceedance ratio. Columns UC and CC report the p-values of the unconditional
and conditional coverage tests. Column DQ represents the p-value of the dynamic quantile test. Column ES-CC
reports the p-value of the McNeil and Frey (2000) ES test. Shades of gray denote that the backtesting procedure in
the column did not pass at a significance level of α = 0.05.
GARCH; τ = 0.05.
Name Tick ESG—Eikon ESG Score Grade SI SR AE UC CC DQ ES-CC

Visa Inc. V 54.37 B− 0.01 0.01 1.01 0.96 0.99 0.29 0.00
Tesla TSLA 63.10 B 0.08 0.06 0.95 0.77 0.17 0.05 0.09
Exxon Mobil XOM 66.33 B 0.05 0.03 0.93 0.64 0.85 0.47 0.17
Eli Lilly LLY 69.33 B 0.11 0.07 0.35 0.00 0.00 0.00 0.05
Mastercard MA 72.67 B+ 0.01 0.01 0.87 0.42 0.33 0.68 0.00
Home Depot HD 72.98 B+ 0.04 0.03 0.95 0.77 0.81 0.65 0.00
P&G PG 73.10 B+ 0.03 0.02 0.93 0.64 0.85 0.81 0.00
Apple AAPL 76.74 A− 0.05 0.04 0.98 0.91 0.8 0.8 0.07
Coca-Cola KO 77.94 A− 0.02 0.02 0.84 0.32 0.59 0.66 0.00
NVIDIA NVDA 79.11 A− 0.05 0.04 0.95 0.77 0.81 0.97 0.11
Pfizer PFE 80.73 A− 0.04 0.03 0.68 0.04 0.02 0.17 0.05
AbbVie ABBV 81.40 A− 0.08 0.06 0.76 0.12 0.1 0.08 0.00
Table 4. Cont.

Bank of America BAC 81.53 A− 0.01 0.01 0.90 0.52 0.16 0.39 0.28
Merck & Co MRK 82.10 A− 0.04 0.03 0.82 0.24 0.49 0.59 0.01
Chevron CVX 83.90 A 0.04 0.03 0.87 0.42 0.67 0.74 0.02
JP Morgan Chase JPM 84.49 A 0.00 0.00 0.98 0.91 0.8 0.12 0.38
J&J JNJ 86.11 A 0.04 0.03 1.01 0.96 0.77 0.99 0.01
Amazon AMZN 86.75 A −0.00 −0.00 1.04 0.83 0.98 0.68 0.07
PepsiCo PEP 89.71 A 0.04 0.03 0.95 0.77 0.81 0.85 0.02
Microsoft MSFT 93.52 A+ 0.04 0.03 1.14 0.38 0.65 0.27 0.00
AS-CAViaR; τ = 0.05.

Visa Inc. V 54.37 B− −0.00 −0.00 1.00 0.99 0.78 0.6 0.51
Tesla TSLA 65.01 B −0.02 −0.02 1.00 0.99 0.28 0.17 0.55
Eli Lilly LLY 66.21 B 0.15 0.09 0.96 0.82 0.97 0.83 0.69
Exxon Mobil XOM 66.33 B 0.16 0.11 1.00 0.99 0.33 0.12 0.83
Home Depot HD 71.10 B+ 0.04 0.03 1.16 0.42 0.69 0.27 0.89
P&G PG 73.10 B+ 0.02 0.02 1.00 0.99 0.98 0.93 0.53
Bank of America BAC 73.76 B+ 0.04 0.03 1.00 0.99 0.98 0.85 0.73
Mastercard MA 75.65 A− −0.00 −0.00 1.04 0.84 0.94 0.99 0.9
Coca-Cola KO 78.58 A− 0.06 0.04 1.04 0.84 0.94 0.95 0.62
NVIDIA NVDA 79.15 A− 0.02 0.01 1.04 0.84 0.25 0.71 0.86
Apple AAPL 79.49 A− 0.02 0.01 1.04 0.84 0.94 0.3 0.77
Pfizer PFE 80.73 A− 0.07 0.05 0.91 0.66 0.21 0.51 0.91
Merck & Co MRK 82.10 A− 0.09 0.06 1.29 0.16 0.27 0.00 0.92
AbbVie ABBV 82.40 A− 0.10 0.07 0.96 0.82 0.97 0.63 0.55
JP Morgan Chase JPM 82.49 A− 0.03 0.02 1.00 0.99 0.78 0.96 0.79
Chevron CVX 86.55 A 0.14 0.10 1.00 0.99 0.98 0.48 0.81
Amazon AMZN 86.75 A −0.06 −0.05 0.96 0.82 0.31 0.88 0.41
PepsiCo PEP 86.95 A 0.08 0.05 1.00 0.99 0.98 0.6 0.61
J&J JNJ 88.35 A 0.05 0.03 0.96 0.82 0.7 0.47 0.61
Microsoft MSFT 92.49 A 0.02 0.01 0.96 0.82 0.31 0.98 0.48
GARCH; τ = 0.05.

Visa Inc. V 54.37 B− −0.00 −0.00 1.21 0.32 0.59 0.86 0.24
Tesla TSLA 65.01 B −0.02 −0.02 1.12 0.54 0.17 0.27 0.23
Eli Lilly LLY 66.21 B 0.15 0.09 0.50 0.01 0.02 0.05 0.12
Exxon Mobil XOM 66.33 B 0.16 0.11 0.79 0.27 0.53 0.35 0.09
Home Depot HD 71.10 B+ 0.04 0.03 1.04 0.84 0.82 0.98 0.07
P&G PG 73.10 B+ 0.02 0.02 0.87 0.51 0.81 0.83 0.03
Bank of America BAC 73.76 B+ 0.04 0.03 0.96 0.82 0.7 0.64 0.55
Mastercard MA 75.65 A− −0.00 −0.00 1.00 0.99 0.78 0.91 0.02
Coca-Cola KO 78.58 A− 0.06 0.04 1.04 0.84 0.94 0.69 0.04
NVIDIA NVDA 79.15 A− 0.02 0.01 0.96 0.82 0.97 0.75 0.6
Apple AAPL 79.49 A− 0.02 0.01 1.00 0.99 0.98 0.56 0.37
Pfizer PFE 80.73 A− 0.07 0.05 0.71 0.12 0.1 0.57 0.88
Merck & Co MRK 82.10 A− 0.09 0.06 0.62 0.04 0.1 0.61 0.03
AbbVie ABBV 82.40 A− 0.10 0.07 0.67 0.07 0.17 0.05 0.00
JP Morgan Chase JPM 82.49 A− 0.03 0.02 1.04 0.84 0.39 0.31 0.35
Chevron CVX 86.55 A 0.14 0.10 0.96 0.82 0.7 0.67 0.07
Amazon AMZN 86.75 A −0.06 −0.05 0.91 0.66 0.32 0.92 0.04
PepsiCo PEP 86.95 A 0.08 0.05 1.04 0.84 0.94 0.53 0.11
J&J JNJ 88.35 A 0.05 0.03 1.00 0.99 0.98 0.98 0.09
Microsoft MSFT 92.49 A 0.02 0.01 1.21 0.32 0.59 0.93 0.22
Table 7. Results for the period January 2021–November 2022; ESG data: 2021; provider: Sustain.;
model: AS-CAViaR; τ = 0.05.
Name Tick ESG—Sustain. ESG Score Grade SI SR AE UC CC DQ ES-CC

Berkshire Hathaway BRK-A 40.10 Severe 0.08 0.06 1.00 0.99 0.78 0.94 0.83
Chevron CVX 38.80 High 0.14 0.10 1.04 0.84 0.94 0.5 0.86
Coca-Cola KO 37.70 High 0.06 0.04 1.00 0.99 0.98 0.85 0.6
Exxon Mobil XOM 36.50 High 0.16 0.11 0.96 0.82 0.97 0.66 0.81
Meta Platform META 34.50 High −0.07 −0.06 1.08 0.69 0.42 0.38 0.47
Amazon AMZN 30.30 High −0.06 −0.05 1.00 0.99 0.33 0.16 0.36
AbbVie ABBV 29.70 Med. 0.10 0.07 1.00 0.99 0.98 0.05 0.57
JP Morgan Chase JPM 29.30 Med. 0.03 0.02 1.00 0.99 0.98 0.65 0.73
Tesla TSLA 28.70 Med. −0.02 −0.02 1.00 0.99 0.28 0.05 0.53
Bank of America BAC 26.80 Med. 0.04 0.03 1.00 0.99 0.78 0.87 0.63
P&G PG 26.70 Med. 0.02 0.02 1.08 0.69 0.00 0.00 0.81
Pfizer PFE 25.20 Med. 0.07 0.05 0.96 0.82 0.07 0.28 0.95
Alphabet INC GOOG 24.60 Med. 0.01 0.01 1.00 0.99 0.98 0.73 0.57
Eli Lilly LLY 24.50 Med. 0.15 0.09 1.00 0.99 0.98 0.75 0.75
J&J JNJ 24.40 Med. 0.05 0.03 0.96 0.82 0.27 0.19 0.59
Costco Wholesale COST 24.20 Med. 0.06 0.04 0.96 0.82 0.97 1.00 0.42
Merck & Co MRK 21.60 Med. 0.09 0.06 0.96 0.82 0.97 0.98 0.62
Table 7. Cont.

United Health UNH 17.40 Low 0.10 0.07 1.00 0.99 0.78 0.98 0.79
Apple AAPL 16.70 Low 0.02 0.01 1.00 0.99 0.78 0.15 0.61
PepsiCo PEP 16.30 Low 0.08 0.05 1.00 0.99 0.98 0.68 0.65
Mastercard MA 15.60 Low −0.00 −0.00 1.00 0.99 0.28 0.77 0.55
Visa Inc. V 15.60 Low −0.00 −0.00 1.00 0.99 0.33 0.18 0.48
Microsoft MSFT 15.20 Low 0.02 0.01 1.00 0.99 0.28 0.98 0.61
NVIDIA NVDA 13.60 Low 0.02 0.01 1.00 0.99 0.28 0.56 0.84
Home Depot HD 12.50 Low 0.04 0.03 0.91 0.66 0.59 0.94 0.52
Table 8. Results for the period January 2021–November 2022; ESG data: 2021; provider: Sustain.;
model: GARCH; τ = 0.05.

Berkshire Hathaway BRK-A 40.10 Severe 0.08 0.06 1.04 0.84 0.39 0.54 0.67
Chevron CVX 38.80 High 0.14 0.10 0.96 0.82 0.7 0.67 0.07
Coca-Cola KO 37.70 High 0.06 0.04 1.04 0.84 0.94 0.69 0.04
Exxon Mobil XOM 36.50 High 0.16 0.11 0.79 0.27 0.53 0.35 0.09
Meta Platform META 34.50 High −0.07 −0.06 0.33 0.00 0.00 0.13 0.06
Amazon AMZN 30.30 High −0.06 −0.05 0.91 0.66 0.32 0.92 0.04
AbbVie ABBV 29.70 Med. 0.10 0.07 0.67 0.07 0.17 0.05 0.00
JP Morgan Chase JPM 29.30 Med. 0.03 0.02 1.04 0.84 0.39 0.31 0.35
Tesla TSLA 28.70 Med. −0.02 −0.02 1.12 0.54 0.17 0.27 0.23
Bank of America BAC 26.80 Med. 0.04 0.03 0.96 0.82 0.7 0.64 0.55
P&G PG 26.70 Med. 0.02 0.02 0.87 0.51 0.81 0.83 0.03
Pfizer PFE 25.20 Med. 0.07 0.05 0.71 0.12 0.1 0.57 0.88
Alphabet INC GOOG 24.60 Med. 0.01 0.01 0.96 0.82 0.31 0.67 0.12
Eli Lilly LLY 24.50 Med. 0.15 0.09 0.50 0.01 0.02 0.05 0.12
J&J JNJ 24.40 Med. 0.05 0.03 1.00 0.99 0.98 0.98 0.09
Costco Wholesale COST 24.20 Med. 0.06 0.04 0.71 0.12 0.16 0.81 0.07
Merck & Co MRK 21.60 Med. 0.09 0.06 0.62 0.04 0.1 0.61 0.03
United Health UNH 17.40 Low 0.10 0.07 1.04 0.84 0.82 0.73 0.56
Apple AAPL 16.70 Low 0.02 0.01 1.00 0.99 0.98 0.56 0.37
PepsiCo PEP 16.30 Low 0.08 0.05 1.04 0.84 0.94 0.53 0.11
Mastercard MA 15.60 Low −0.00 −0.00 1.00 0.99 0.78 0.91 0.02
Visa Inc. V 15.60 Low −0.00 −0.00 1.21 0.32 0.59 0.86 0.24
Microsoft MSFT 15.20 Low 0.02 0.01 1.21 0.32 0.59 0.93 0.22
NVIDIA NVDA 13.60 Low 0.02 0.01 0.96 0.82 0.97 0.75 0.6
Home Depot HD 12.50 Low 0.04 0.03 1.04 0.84 0.82 0.98 0.07
Robustness Check
So far, no evidence of connections between individual high ESG rates and superior
financial performance (and vice versa) has been found. To strengthen our analysis, we
performed a robustness check analysis devoted to verifying if the previous findings were
confirmed when portfolios (instead of individual stocks) were considered. Therefore, we
built three portfolios characterized by a low, medium, and high ESG risk. Due to the
heterogeneous degree of rates between the two ESG providers used in this work, the three
portfolios differed when Eikon and Sustainalytics data were considered. In particular,
when Eikon data were used, the low-risk portfolio consisted of assets with A and A- ESG
rates (as shown in Table 2), the medium-risk portfolio with B+ and B, and the high-risk
portfolio with B- and C. When Sustainalytics data were used, the low-, medium-, and
high-risk (which also included the only asset with a “Severe” rate) portfolios were directly
obtained. The detailed composition of the portfolios is described in the table-note of Table 9.
Once the portfolios had been built, we adopted an equally weighted strategy to weight the
importance of each asset. Then, the portfolio returns were used to evaluate the portfolios’
financial performance as done previously with the individual assets. The results of the
portfolio analysis are reported in Table 9. Unsurprisingly, all the portfolios brilliantly
pass the backtesting procedures, independently of their ESG risk, the model (whether
AS-CaViar of GARCH), and the data provider. Regarding the SI and SR indexes, there was
a slightly better performance of the medium-ESG-risk portfolio with respect to the low-
and high-ESG-risk portfolios.
Table 9. Portfolio analysis for the period January 2021–November 2022; τ = 0.05.
ESG Risk SI SR Model AE UC CC DQ ES-CC
Eikon
AS-CAViaR 1.04 0.84 0.38 0.48 0.93
Low 0.05 0.04
GARCH 1.33 0.11 0.28 0.19 0.55
AS-CAViaR 1.00 0.99 0.78 0.81 0.60

Medium 0.05 0.04
GARCH 1.04 0.84 0.25 0.17 0.16
AS-CAViaR 1.00 0.99 0.98 0.68 0.70

High 0.03 0.02
GARCH 1.25 0.23 0.48 0.55 0.91
Sustainalytics
AS-CAViaR 1.00 0.99 0.28 0.45 0.65
Low 0.03 0.02
GARCH 0.96 0.82 0.97 0.64 0.21
AS-CAViaR 1.04 0.84 0.94 0.33 0.65

Medium 0.07 0.05
GARCH 1.12 0.54 0.74 0.38 0.39
AS-CAViaR 1.00 0.99 0.28 0.46 0.56

High 0.04 0.03
GARCH 1.16 0.42 0.69 0.38 0.29
Notes: Eikon data, low-risk portfolio (A and A− grades as shown in Table 2): MSFT, JNJ, PEP, AMZN, CVX,
JPM, ABBV, MRK, GOOG, PFE, AAPL, NVDA, KO, MA; Eikon data, medium-risk portfolio (B+ and B grades
as shown in Table 2): BAC, UNH, PG, COST, HD, XOM, LLY, META, TSLA; Eikon data, high-risk portfolio (B−
and C grades as shown in Table 2): V, BRK-A. Sustainalytics data, low-risk portfolio: HD, NVDA, MSFT, MA,
V, PEP, AAPL, UNH; Sustainalytics data, medium-risk portfolio: MRK, COST, JNJ, LLY, GOOG, PFE, PG, BAC,
TSLA, JPM, ABBV; Sustainalytics data, high-risk portfolio: AMZN, META, XOM, KO, CVX, BRK-A. Column
SI denotes the Sortino index based on the average excess return over the downside risk, and SR is the Sharpe
ratio calculated as the ratio of the asset’s mean excess return and its standard deviation. Column AE denotes
the actual over expected exceedance ratio. Columns UC and CC report the p-values of the unconditional and
conditional coverage tests. Column DQ represents the p-value of the dynamic quantile test. Column ES-CC
Concluding, the robustness analysis did not allow us to identify superior financial
performance according to higher ESG scores either (meaning that the ESG risk was low) in
the cases of both the Eikon and Sustainalytics providers. At the same time, the high-ESG-
risk portfolios did not perform differently from the other portfolios. In other words, the
stock market performance did not positively (negatively) react to high ESG (low) rankings.
This result is in line with what was found in the analysis of individual stocks.
5. Policy Implications and Concluding Remarks

Many companies are organizing their activities to consider the ESG pillars, which
are becoming a new paradigm that links self-interest and individual profit. Indeed, the
recent literature has confirmed trends in which a firm using strategies to achieve goals
based on ESG targets can create greater shareholder value [48]. The present analysis
aimed to investigate the risk market performance in terms of risk-adjusted indicators
(that is, the Sharpe ratio and the Sortino index) and the adequacy of tail risk measures
(namely, the Value-at-Risk (VaR) and Expected Shortfall (ES)) of a set of listed firms with
different ESG scores provided by two agencies: Eikon and Sustainalytics. The models
used to obtain the VaR and ES measures were the GARCH [54] and asymmetric slope
(AS-)CAViaR [55]. The empirical analysis considered the first 25 constituents (by weight) of
the S&P500 index in the period from 2020 and 2022. Our findings indicated that the risk
market performance did not respond positively to high ESG rates or negatively to low ESG
rates, independently of the tail risk models used (whether GARCH or AS-CAViaR) or the
ESG data providers. However, there was no evidence to suggest that this would lead to
lower performance. The analysis was then completed by a robustness check where three
portfolios were built according to a low, medium, and high level of ESG risks. The ESG
rates being heterogeneous among the two ESG providers here considered, globally, there
were six portfolios. Then, the same analysis performed on individual stocks was carried
out on the portfolios. The previous findings were largely confirmed: all the portfolios
passed the backtesting procedures, irrespective of their (low, medium, or high) ESG risk,
the model used (whether AS-CaViar of GARCH), and the data provider. Thus, both the
univariate and multivariate analyses yielded the same conclusions. In more detail, the stock
market performance (in terms of risk-adjusted indicators and tail risk measures’ adequacy)
of both individual stocks and portfolios did not positively (negatively) depend on high
(low) ESG rates.
Further research could involve more assets. Moreover, from the multivariate point of
view, the analysis could adopt the global minimum variance strategy to find the optimal
weights of the portfolios. Furthermore, the set of univariate models could also be enlarged.
Moreover, a further analysis is needed to examine the determinants of firms’ responses
across a larger sample of corporations. It seems reasonable to examine how rating agencies
could interact with each other for the data collection and how they could focus their
attention on sustainability objectives for investors and firms. In this way, policy actions
could be aimed at highlighting the good features of rating agencies and at making the
bad ones weak. Another important issue to be noted is that the analysis considered the
years 2020 and 2021. This means that the evaluation could have suffered from the influence
of the COVID-19 pandemic. Indeed, recent contributions in the literature found that
companies could assume different behaviors in terms of ESG in response to the COVID-19
pandemic [48]. In addition, for this reason, further research involving larger sample periods
is needed so that the results of this analysis may be compared with those of subsequent
years and may thus be considered more robust.
Author Contributions: Conceptualization, L.A., A.A. and V.C.; methodology, A.A. and V.C.; software,
A.A. and V.C.; formal analysis, A.A. and V.C.; investigation, L.A., A.A. and V.C.; resources, A.A.
and V.C.; data curation, A.A. and V.C.; writing—original draft preparation, L.A., A.A. and V.C.;
writing—review and editing, L.A., A.A. and V.C. All authors have read and agreed to the published
version of the manuscript.
Funding: The authors gratefully acknowledge funding from the Italian Ministry of Education Uni-
versity and Research MIUR through PRIN project Econometric Methods and Models for the Analysis
of Big Data: Improving Forecasting Ability by Understanding and Modelling Complexity [grant number
201742PW2W_002].
Data Availability Statement: All of the stock data were collected from the Yahoo Finance site. The
ESG scores were collected from the Eikon and Sustainalytics sites.
Conflicts of Interest: The authors declare no conflict of interest.
Abbreviations
The following abbreviations are used in this manuscript:
ESG Environmental, social, and governance

SI Sortino index
SR Sharpe ratio
VaR Value-at-Risk
ES Expected Shortfall
UC Unconditional coverage
CC Conditional coverage
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sustainability

Keywords: ESG rating; investments; stock returns; Value-at-Risk; Expected Shortfall

Sustainability 2023, 15, 7183. https://doi.org/10.3390/su15097183 https://www.mdpi.com/journal/sustainability

Table 1. Literature Overview.

3. Risk-Adjusted Indicators and Tail Risk Measures

Pr (rt < VaRt,τ |Ft−1 ) = τ,

ESt,τ = E[rt |rt < VaRt,τ , Ft−1 ].

where `(·) is the news impact curve.

where I (·) is an indicator function.

where the ES in (4) is calculated as:

ESt (τ ) = (1 + exp(γES ))VaRt (τ ). (5)

Table 2. Assets and ESG ratings.

Name Tick ESG—Eikon ESG—Score: Grade SI SR AE UC CC DQ ES-CC

Name Tick ESG—Eikon ESG Score Grade SI SR AE UC CC DQ ES-CC

Name Tick ESG—Eikon ESG Score Grade SI SR AE UC CC DQ ES-CC

Name Tick ESG—Eikon ESG Score Grade SI SR AE UC CC DQ ES-CC

Name Tick ESG—Eikon ESG Score Grade SI SR AE UC CC DQ ES-CC

Name Tick ESG—Sustain. ESG Score Grade SI SR AE UC CC DQ ES-CC

Name Tick ESG—Sustain. ESG Score Grade SI SR AE UC CC DQ ES-CC

Name Tick ESG—Sustain. ESG Score Grade SI SR AE UC CC DQ ES-CC

ESG Risk SI SR Model AE UC CC DQ ES-CC

AS-CAViaR 1.00 0.99 0.78 0.81 0.60

AS-CAViaR 1.00 0.99 0.98 0.68 0.70

AS-CAViaR 1.04 0.84 0.94 0.33 0.65

AS-CAViaR 1.00 0.99 0.28 0.46 0.56

5. Policy Implications and Concluding Remarks

ESG Environmental, social, and governance

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