Modelling Environmental Risk

As environmental issues have become increasingly important in economic research and policy forsustainable development, firms in the private sector have introduced environmental and social issues in conductingtheir business activities. Such behaviour is tracked by the Dow Jones Sustainable Indexes (DJSI) through financialmarket indexes that are derived from the Dow Jones Global Indexes. The sustainability activities of firms areassessed using criteria in three areas, namely economic, environmental and social. Risk (or uncertainty) is analysedempirically through the use of conditional volatility models of investment in sustainability-driven firms that areselected through the DJSI. The empirical analysis is based on financial econometric models to determine theunderlying conditional volatility, with the estimates showing that there is strong evidence of volatility clustering,short and long run persistence of shocks to the index returns, and asymmetric leverage between positive and negativeshocks to returns.