Natural disaster, ESG investing, and financial contagion.

Abstract

This study investigates financial contagion during natural disasters and explores the potential advantage of environmental, social, and governance (ESG) investing in such contagion. Specifically, we propose a new edge-weighted undirected contagion network to explore disaster-driven contagion and transmission channels across sectors, asset classes, and ESG international indexes. Our empirical results demonstrate the existence of the disaster-driven contagion. Natural disasters may increase investors' risk aversion, which further magnify portfolio rebalancing behavior, leading to the spread of financial contagion. Moreover, we also find that ESG investing helps mitigate the spread of disaster-driven contagion, thereby contributing to the resilience of the financial system during natural disasters.