Numerous fund managers and data providers postulate that implementing good environmental, social, and governance (ESG) practices can help build social capital and trust in a firm, ultimately enabling the company to better overcome challenges presented by a crisis (Demers et al., 2021). While this may sound reasonable in theory, its validity in reality is an empirical question. In this article, we will introduce recent academic studies that explore the relationship between ESG performance and stock price resilience during times of crisis.
Demers et al. (2021) examined whether strong ESG performance acted as an “equity vaccine” during the COVID-19 crisis by investigating the relationship between stock returns and ESG scores during the crisis period. The findings suggest that companies with good ESG scores did not fare better than their less ESG-performing rivals during the pandemic-induced market selloff, indicating that ESG scores did not shield against severe value destruction.
Demers et al. (2021) differs from an earlier study that used a similar sample conducted by Albuquerque et al. (2020). Unlike the former study, which examined all three aspects of ESG (i.e., environmental, social, and governance), the latter study focused only on the environmental and social (ES) aspects, omitting the governance effect. The latter study found a positive relationship between abnormal stock returns and ES scores during the COVID-19 crisis period.
The difference in findings between Demers et al. (2021) and Albuquerque et al. (2020) appears to be partially due to the latter study’s narrower focus on the environmental and social dimensions. This aligns with the growing concern about the environmental and social sustainability of human society since the outbreak of the pandemic, which may have prompted investors to consider these factors when making investment decisions.
Rubbaniy et al. (2021) provide a more nuanced perspective on the issue by considering the varying levels of uncertainty during the COVID-19 crisis period. The study’s findings suggest that the safe-haven properties of ESG stocks (i.e., those with high ESG scores) depend on the level of COVID-19-related uncertainty. Using the global COVID-19 fear index (GFI) developed by Salisu & Akanni (2020) as a proxy for uncertainty, the authors find a positive association between the returns of ESG stocks and the GFI. This implies that higher levels of fear induced by COVID-19 cause ESG stocks to gain more and behave like safe havens. Interestingly, an alternative fear index does not exhibit a significant relationship with ESG stock returns.
ESG stocks’ resilience has also been examined in the context of other crises. For example, several academic studies on the 2008-2009 financial crisis found that good ESG practices were associated with better stock performance or lower downside risk during the crisis (e.g., Cornett et al., 2016; Lins et al., 2017; Bouslah et al., 2018). These findings are useful for investors seeking to understand the risk-mitigating effect of ESG practices, particularly those who plan to incorporate ESG factors into portfolio decisions. However, they do not guarantee that ESG stocks will be immune to future crises.
Reference:
Albuquerque, R., Koskinen, Y., Yang, S., Zhang, C. (2020). Resiliency of Environmental and Social Stocks: An Analysis of the Exogenous COVID-19 Market Crash, The Review of Corporate Finance Studies 9 (3): 593–621. https://doi.org/10.1093/rcfs/cfaa011
Bouslah, K., L. Kryzanowski, & B.M. Zali (2018). Social Performance and Firm Risk: Impact of the Financial Crisis. Journal of Business Ethics 149(3): 643–69.
Cornett MM, O. Erhemjamts, & H. Tehranian (2016). Greed or good deeds: An examination of the relation between corporate social responsibility and the financial performance of U.S. commercial banks around the financial crisis. Journal of Banking & Finance 70: 137-159.
Demers, E, J. Hendrikse, P. Joos, & B. Lev (2021). ESG did not immunize stocks during the COVID-19 crisis, but investments in intangible assets did. Journal of Business Finance & Accounting 48 (3-4).
Lins, KV, H. Servaes, & A. Tamayo (2017). Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility during the Financial Crisis. Journal of Finance 72(4): 1785-1824
Salisu, A. A., & L. O. Akanni (2020). Constructing a global fear index for the COVID-19 pandemic. Emerging Markets Finance and Trade 56(10): 2310-2331.
Rubbaniy, G. , A. A. Khalid, A. Samitas & S. Ali, Are ESG Stocks Safe-Haven during COVID-19? (February 4, 2021). Available at SSRN: https://ssrn.com/abstract=3779430 or http://dx.doi.org/10.2139/ssrn.3779430
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