Sustainable synergy: Static and dynamic nexus between ESG and BRICS equity markets

Sustainable finance has become the new frontier in global investments, redefining success beyond mere profit margins. For the BRICS economies, this paradigm shift presents both a challenge and an opportunity to reimagine their role in the evolving world of responsible investing. Therefore, this study examines the connectedness between environmental, social, and governance (ESG) leader indices and the BRICS equity markets using the TVP-VAR model. Our return and volatility connectedness results demonstrate a moderate level of transmission between ESG and conventional equity markets. Moreover, the system integration increased substantially during COVID-19 compared to pre-COVID-19, highlighting the strong impact of global events on financial market behavior. ESG (conventional) stocks predominantly emerge as net transmitters (recipients) of return and volatility shock to the system. The dynamic analysis reveals a notable increase in system connectedness, exhibiting increased transmission during an uncertain market environment. Our portfolio analysis suggests that investors should increase their investment in BRICS equity markets during COVID-19 to get higher diversification benefit, however hedging ESG with conventional stocks becomes expensive (higher hedge ratio) during a turbulent period. These results have substantial implications for portfolio management, suggesting that ESG can effectively mitigate risk and optimize portfolio performance. [Display omitted] •We examine the connectedness between the ESG and BRICS equity market.•Connectedness is considerable between the selected assets.•ESG stocks are the net return and volatility transmitters, while conventional stocks are net recipients.•Rapid fluctuations in connectedness are noticed during the COVID-19 pandemic.•Investors can hedge or diversify their portfolio risk using a combination of ESG stock and BRICS.