Mitigating Contagion Risk by ESG Investing

We study whether ESG investing may mitigate the risk of contagion among equity mutual funds. More precisely, we measure impact fire-sale spillover, propagating throughout financial system, on funds ranked aspects. compare relative loss capitalization experienced by high- and low-ranked Contagion, which is indirect since are not exposed to counterparty risk, modeled using a network structure. In cases deleveraging from funds, spillover propagates because common asset holdings find that funds’ vulnerability decreases when level compliance increases. Moreover, average lower for high-ranked than ones. The small-size mainly drive result. Our findings indicate less effective From macroeconomic perspective, represents new opportunity diversification makes system more resilient contagion.