Stock return co-movements in ESG investing: An African context

Abstract

This study investigates the relationship between Environmental, Social, and Governance (ESG) focused investments, driven by the growing emphasis on ESG within financial markets. The study considers three African markets, which are the only African markets that currently offer dedicated ESG indices. The markets considered are: South Africa, Egypt, and Morocco. The analysis is conducted by examining co-movements between the ESG indices of the selected markets – the FTSE/JSE Top 30 Responsible (J110EP) Index for South Africa, the S&P/EGX ESG (SPEGESGE) Index for Egypt, and lastly the ESG 10 (ESGI) Index (recently named “MASI ESG”) for Morocco. The ESG 10 Index was formed in September 2018 and for that reason, this study considers a sample period ranging from January 2019 to December 2023. Total index return data is extracted from Bloomberg and the Moroccan Stock Exchange. The study tests co-movement through Principal Components Analysis (PCA), using the whole sample, and 12-month rolling window periods to uncover the largest proportion of variation in returns. Secondly, the study examines instances of structural breaks, using the Bai and Perron (2003a) multiple structural breaks tests, aiming to analyse the dynamics in co-movements in these markets. Lastly, the study tests for dynamic co-movement by pairing the indices and estimating the product of their z-scores, with the aim of identifying index pairs with a high number of positive estimates. The results of this study suggest no significant co-movement between the indices, with the exception of critical global crises such as the COVID-19 pandemic and the Ukraine-Russia war. During these events, the indices exhibited extreme co-movement, as expected, due to market downturns. Outside of these crises, no notable co-movement was observed, suggesting that ESG investors are not disadvantaged by focussing on ESG stocks.