Can One Reinforce Investments in Renewable Energy Stock Indices with the ESG Index?

Studies on the environmental, social, and governance (ESG) index have become increasingly important since the ESG index offers attractive characteristics, such as environmental friendliness. Scholars and institutional investors are evaluating if investment in the ESG index can positively change current portfolios. It is crucial that institutional investors seek related assets to diversify their investments when such investors create funds in the renewable energy sector, which is highly related to environmental issues. The ESG index has proven to be a good investment choice, but we are not aware of its performance when combined with renewable energy securities. To uncover this nature, we investigate the dependence structure of the ESG index and four renewable energy indices with constant and time-varying copula models and evaluate the potential performance of using different ratios of the ESG index in the portfolio. Criteria such as risk-adjusted return, standard deviation, and conditional value-at-risk (CVaR) show that the ESG index can provide satisfactory results in lowering the potential CVaR and maintaining a high return. A goodness-of-fit test is then used to ensure the results obtained from the copula models.