The Impact of ESG Rating on Hedging Downside Risks: Evidence from a Weight-Tilted Hang Seng Index

Abstract

The study examines the return performance and resilience to market volatility of the recently introduced environment, social/sustainable, and governance (ESG) weight-tilted Hang Seng index compared to its parent, the Hang Seng index. The ESG-infused index has a higher mean return and lower return volatility than the parent index, although the differences are statistically and economically insignificant, a result consistent with the high correlation between the two index returns. Most importantly, the ESG weight-tilted index is more resilient to volatility spikes than the parent index and, therefore, has lower downside risks. The overall results show that stocks with high ESG ratings are less susceptible to trading pressures triggered by volatility-induced turnovers. The paper contributes to the literature by providing significant incremental information on the emerging market for ESG-related equity products in Hong Kong.