The temporal variability in the returns of socially responsible funds to structural oil shocks

Abstract

In this paper, we investigate the potential presence of returns comovement between socially responsible investment (SRI) funds and oil shocks based on daily data from March 8, 2016 to June 11, 2021. According to the seminal work of Ready (2018), oil shocks can be supply-, demand-, or risk-driven in nature. We applied a contemporary rolling window wavelet correlation approach across various levels of decomposition to measure the degree of comovement between oil shocks and SRI returns. The results of this highlight the heterogeneous influence of oil shocks on SRI returns. More specifically, demand shocks have a positive influence, whereas risk shocks show a negative correlation with SRI returns. In contrast, the results for supply shocks are mixed. We also noted the causal effect of risk shocks on the returns of SRI funds. This work has implications for investors who follow the ESG framework under the influence of the international oil market.