Are we over-optimistic about risk mitigation effects of ESG investments? Evidence from ETFs during Covid-19

This article examines the risk-related financial performance for ESG (Environmental, Social, and Governance) through the investments of ETFs. We employ Oil & Gas ETFs as a benchmark. We introduce the Value-at-Risk (VaR) and modified Sharpe Ratio based on such measurement as representative of extreme risk protection, and test the excess abnormal return of related portfolios. Sample of this study covers the Covid-19 period as a special experimental environment. We provide unique forecast combination method with a scoring function to predict the VaR of chosen ETFs, which helps to incorporate the non-normal distribution of returns into the prediction. We test the out-of-sample performance of our forecasting and prove that is more accurate than using a single one. The findings indicate that, during the pandemic crisis, ESG ETF provides higher VaR but identical modified Sharpe ratio. Additionally, we display that our portfolio provides positive abnormal return in helps of adding a short position of Oil & Gas ETF