The effects of investor sentiment and business cycles on the systematic risk of an ESG portfolio (PLoS ONE)

Summary

• Global ESG assets under management across mandates, mutual funds, and private markets were estimated at $18.4 trillion in 2022.p.1
• ESG investments represented 14.4% of asset wealth management in 2022, with projections indicating a potential rise to 21.5% by 2026.p.1
• Growth in sustainable funds slowed to 0.03% in the final quarters of 2023, compared to 0.5% growth across the general funds market.p.1

Key insights

1. Investor sentiment proxied by fear is not a statistically significant source of systematic risk during economic expansions but becomes highly significant during recessions and rising interest rate cycles.p.1
2. Sustainable fund growth virtually flattened to 0.03% in late 2023 while general funds grew at 0.5%.p.1
3. The World Index is the primary driver of ESG systematic risk during economic expansion phases, contributing 77.38%.p.8
4. Investor sentiment becomes the dominant contributor to systematic risk in ESG portfolios during economic troughs and recessions at 45.94%.p.8
5. Idiosyncratic volatility for the ESG portfolio peaked in March 2022, aligning with the initiation of Federal Reserve interest rate increases.p.7
6. A threshold VIX level of 23.81 serves as the regime cut-off point where active VIX futures traders alter investment strategies.p.5