On the relationship between policy uncertainty and sustainable investing

Abstract

Purpose

In recent times, sustainable investment gaining much attention within the investors’ community and it is broadly driven by environmental, social and governance (ESG) factors. This study aims to examine the ESG-based sustainability index and economic policy uncertainty (EPU).

Design/methodology/approach

Corporate sustainability assessment procedure yields Dow Jones sustainability indexes (DJSIUS) and ESG compliant firms become a member of such indexes. To uncover the effects of policy uncertainty as follows: the study considers EPU index, equity market policy uncertainty index, economic and political events for the period 2000–2017. The authors present the study using a conditional volatility framework.

Findings

The correlation between the DJSIUS and policy uncertainty appears to be negative and statistically significant. It is apparent from the results that policy uncertainty does contain important ESG factors that explain the sustainable investment in US firms. Moreover, the stock market boom, credit crunch, Lehman collapse and fiscal crises have shown significant adverse effects on the sustainability index. More importantly, it is seen that investors’ sustainable investing considers presidential election years for portfolio planning; the uncertainty associated with the election years has also shown a negative impact on the sustainable returns.

Practical implications

First, sustainability is essential for the long-term stakeholders’ wealth maximization under governments’ policy uncertainty such as constrained resources, demographic and climate-change-policy, societal expectations, public-policies, regulatory structure. Second, EPU creates new opportunities and risks for sustainable firms and sustainable investing.

Originality/value

The study is novel in which the authors present the effects of uncertainty on socially responsible investing.

Citation

Shaikh, I. (2022), "On the relationship between policy uncertainty and sustainable investing", Journal of Modelling in Management, Vol. 17 No. 4, pp. 1504-1523. https://doi.org/10.1108/JM2-12-2020-0320