Investor sentiment and sustainable investment: evidence from North African stock markets

Abstract This paper examines the connectedness between investor sentiment and returns and volatility on environmental, social, and governance (ESG) indices in Morocco and Egypt. Therefore, we construct a new investor sentiment index and use weekly data from January 2018 to December 2023, along with the time, frequency and quantile connectedness methods. The results show that investor sentiment sometimes influences the returns and volatility of the ESG indices, and sometimes it is influenced by them. This connectedness is stronger during distress events, namely, the COVID-19 outbreak and geopolitical tensions (the Russian-Ukrainian and Israeli-Palestinian conflicts). Furthermore, the spillover effect between sentiment and returns on the ESG indices is mainly due to short-term spillovers, except during the COVID-19 period, when long-term spillovers dominate. However, the spillover effect between sentiment and volatility on the ESG indices is mainly due to long-term spillover, especially during the COVID-19 outbreak and the Russia-Ukraine War, implying the persistence of shock transmission due to high uncertainty. The findings also highlight the impact of market conditions on spillovers. These findings can help socially responsible investors successfully diversify their portfolios and adjust their strategy according to investor sentiment; they also have beneficial implications for policymakers in achieving sustainable development goals.