ESG Ratings and Stock Performance during the COVID-19 Crisis

Nils Engelhardt,Peter Posch,Jens Ekkenga

doi:10.3390/su13137133

Nils Engelhardt, Peter Posch + Show 1 more

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https://doi.org/10.3390/su13137133

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Journal: Sustainability	Publication Date: Jun 25, 2021
Citations: 74	License type: CC BY 4.0

Affiliation: TU Dortmund University, University of Giessen

Abstract

We investigate the association between Environmental, Social, and Governance (ESG) ratings and stock performance during the COVID-19 crisis. Although there is mixed evidence in the literature whether ESG is valuable in times of crisis, we find high ESG-rated European firms to be associated with higher abnormal returns and lower stock volatility. After decomposing ESG into its separate components, we find the social score to be the predominant driver of our results. Further, we argue that ESG is value-enhancing in low-trust countries, and in countries with poorer security regulations and where lower disclosure standards prevail.

Highlights

In the literature there is a debate of whether engaging in corporate social responsibility (CSR) activities is beneficial [1,2,3]
We investigate whether there is a link between CSR activities and a firm’s stock performance in terms of higher stock returns and lower stock volatility in the beginning of 2020, because the unexpected and exogenous COVID-19 shock serves as a brilliant opportunity to test this relationship
We control for ROE, profitability, cash holdings and different proxies for corporate debt because firms with stronger financial conditions may have higher stock returns over the COVID-19 crisis period [10]

Summary

Introduction

In the literature there is a debate of whether engaging in corporate social responsibility (CSR) activities is beneficial [1,2,3]. Some studies have shown that CSR activities are solely a manifestation of agency conflicts between a firm’s shareholders and managers, who benefit from engaging in CSR at the expense of a firm’s shareholders [4,5], while other research has shown that engaging in environmental, social, and governance (ESG) is value-enhancing due to the hypothesis that well-governed corporations can achieve both, higher profits and better social conditions [2,6,7,8] In line with these arguments, there is mixed evidence in the literature regarding the relationship between a firm’s CSR activities and its stock performance, especially during times of crisis.

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Conclusion