Mitigating Contagion Risk by ESG Investing

Round 1

Reviewer 1 Report

This work contributes to the literature providing new evidence about the assessment of risk associated with ESG factors in the mutual funds' industry. Based on its originality, I strongly recommend its publication, however with minor revisions.

This said, I have some suggestions for further analysis:

• It is unclear the timespan of the database
• Consider an alternative source of ESG – ESG Refinitiv – to assign mutual funds according to the scale used by the authors (from low to high). Reestimate the empirical analyses.

Author Response

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Author Response File: Author Response.pdf

Reviewer 2 Report

Thanks for giving me a good paper to review. My impression is that this is a very well-written and well-organised paper. The analysis is also good but quite descriptive. The authors can improve the manuscript by the following suggestions. I hope my suggestions will be helpful for authors to improve their paper.

1. Add the clearer discussions on contribution and implications of the study (in introduction).
2. Add LR and hypotheses sections. This should be separated from the introduction section. By this way, the authors can improve the theoretical discussions and set the hypotheses in a more appropriate way.
3. Discussing about the underlying (theoretical) channels and testing for this may improve the quality of the paper.
4. Data and sample should be discussed separately
5. Add additional tests to enrich the story of the paper, and robustness checks can be considered.

Author Response

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Author Response File: Author Response.pdf

Reviewer 3 Report

The studied theme is very interesting. It concerns a very actual and current topic.

Regarding Abstract, please reconsider respecting the structure: (1) Background: Place the question addressed in a broad context and highlight the purpose of the study; (2) Methods: briefly describe the main methods or treatments applied; (3) Results: summarize the article's main findings; (4) Conclusions: indicate the main conclusions or interpretations. The abstract should be an objective representation of the article and it must not contain results that are not presented and substantiated in the main text and should not exaggerate the main conclusions.

 

Research hypotheses were clearly stated and the results were correlated with them.

The methodology was determined accurately.

The language is very clear and readable.

Literature review is adequate to the subject. The novelty of research is clearly presented.

I only suggest to create a last section of the paper named Limitations and Outlook (Section 5) and to ensure English one more time. The manuscript should respect more accurate the Journal template.

Author Response

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Author Response File: Author Response.pdf

Reviewer 4 Report

REVIEW OF THE PAPER “MITIGATING CONTAGION RISK BY ESG INVESTING”
Summary of the paper
This paper aims to investigate the resilience of high ESG rated investment funds, studying
their contagion risk during fire-sale spillovers. The analysis is performed using a bipartite
network, with two sets of nodes: one representing funds and another holdings.
Each fund has a Morningstar ESG evaluation consisting of five different ESG compliance
levels. Considering every compliance rate, this work studies for each fund the
corresponding Vulnerability Index to contagion risk, which measures resilience in terms of
percentage relative loss of market value.
As reported in the paper, the objective is to study the correlation between Vulnerability to
contagion risk and ESG rates.
In those situations where there is a massive sell-out contagion, risk turns out because of the
high number of assets in common that usually conventional investment funds present
among themselves.
The results obtained by the authors suggest that higher rated funds lose lower percentages
of market value during fire-sale spillovers. The main reason is that following the ESG
criterion to invest, the resulting portfolio does not overlap with the rest of the financial
market portfolios. So even if returns of ESG investments are lower than the conventional
ones, portfolios built following a socially responsible strategy turn out to be less exposed to
contagion risk.
To conclude, it is a really interesting work that aims to answer a new question about ESG
investing. Overall, I enjoyed reading it.
Below there are some comments.
COMMENTS
- Introduction, page 1, row 23. Can we assume that “sin” stocks appear to be more
controversial? Are they exposed to a higher downturn risk because of it?
(Kim et al. (2021), Adamska et al. (2021))
- Section 2. In Eq. (3) ?? is the volatility of asset k. Can you specify how this volatility
is obtained? Do you assume it is constant over time? Or is it daily?
- Section 2. In Eq. (3) What is the constant “c” in the empirical analysis? Is the same
“category” reported in row 8 of page 7?
- Section 3, page 13, row 1. Given the last two years, the reaction of ESG high ranked
funds to the pandemic shock could also be mentioned. (Omura et al. (2021))
- Section 3. Table 2: There is written “Kurtorsis” instead of “Kurtosis”.
- Conclusions, row 16. Can we read this phenomenon as a new diversification
opportunity based on a different screening criteria? (Charfeddine et al. (2016))
References
Kim, S, Lee, G, Kang, H-G. Risk management and corporate social responsibility. Strategic
Management Journal, 2021, 42(1), 202-230.
Agata Adamska, Tomasz J. Dąbrowski. Investor reactions to sustainability index
reconstitutions: Analysis in different institutional contexts, Journal of Cleaner Production,
2021, 297, 126715.
Akihiro Omura, Eduardo Roca, Miwa Nakai, Does responsible investing pay during
economic downturns: Evidence from the COVID-19 pandemic, Finance Research Letters,
2021, 42, 101914.
Lanouar Charfeddine, Ahlem Najah, Frédéric Teulon, Socially responsible investing and
Islamic funds: New perspectives for portfolio allocation, Research in International Business
and Finance, 2016, 36, 351-361.

Author Response

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Author Response File: Author Response.pdf

Round 2

Reviewer 2 Report

Many thanks for the great efforts of the authors in addressing my comments, and thanks for an interesting paper. All have been much improved now, so I recommend an acceptance in present form.