Understanding Environmental, Social and Governance (ESG) contributions in the downside systematic and systemic risk measurement of the insurance sector in (non)-stressful times

The file attached to this record is the author's final peer reviewed version. The Publisher's final version can be found by following the DOI link.Sustainable responsible investing is gaining traction globally because of its contribution to climate solutions and this has therefore led to the growth in professionally managed assets linked to sustainability characterizations. In this sense, environmental, social, and governance (ESG) investing has become a unique feature of capital markets, necessitating the need to determine the extent to which ESG Scores can be related to a company’s riskiness, as confirmed by the European Banking Authority (EBA) that ESG scores can contribute to risk. To assess these risk typologies inherent in the financial markets concerning a mix of (non) ESG-linked assets, we employ an extension of the extreme downside hedge (EDH) and the extreme downside correlation (EDC) coupled with innovative network analysis and unsupervised machine learning technique to investigate the sensitivity of assets to the downside risk of other financial assets under severe firm/company-level and sector market conditions. We account for three different economic scenarios: namely before the COVID-19 outbreak, during the COVID-19 outbreak and the recovering phase, and the results reveal monotonically increasing levels of market integration during the three periods, respectively. Furthermore, we account for the role of ESG Scores implicitly via (non) ESG-related assets, which shows that firms with no or low ESG ratings are vulnerable to the spread of risk in the insurance industry and vice-versa. In consequence, firms that are safest for the purpose of diversification are identified