Were ESG firms really more resilient during the COVID-19 crisis?

Over the last few years, a growing number of studies have shown that strong ESG (an acronym for environmental, social, and governance) practices not only produce better financial performance, but also significantly improve company resilience during crises. What conclusion, then, can we draw from the 2020 pandemic?

This global crisis obviously caused a huge negative impact on the operation of firms, threatening their development and, at worst, their very survival. But were some of these companies more resilient than others? More specifically, is there a link between strong ESG practices and better performances during a crisis period ? These are the questions my latest paper (1), which I wrote with Mirco Rubin, Dario Ruzzi & Mathijs van Dijk, sets out to answer.

Does sustainability really matter during times of crisis ?

The rise of ESG investing has been evident. To take an example, inflows into sustainable funds rose from 5 billion dollars in 2018 to nearly 70 billion dollars in 2021. This surge has significantly reshaped the landscape of corporate finance. According to McKinsey, more than 90 percent of S&P 500 companies now publish ESG reports in some form. But when it comes to crises, do ESG firms really perform better, as data tends to show?

Indeed, recent studies suggest that companies with strong ESG ratings are relatively resilient to crises. Lins, Servaes and Tamayo (2) showed that strong ESG stocks in the US outperformed during the 2008–2009 financial crisis. Albuquerque, Koskinen, Yang and Zhang (3) presented similar results for the COVID-19 stock market crash for the US.

However, the empirical evidence collected so far mostly focuses on the US and on a single asset class, the stock market. What about the other corporate asset classes, like credit default swaps (CDS) and bonds?

ESG and long-term resilience: a study across 63 countries

The study we conducted explores the resilience of firms with strong ESG ratings across 63 countries and three asset classes : stocks, CDS and corporate bonds, during the COVID-19 crisis.

One interesting finding is that the resilience of strong ESG firms is not a consistent global phenomenon and varies considerably across countries.

It is only in North America that stocks, CDS and bonds of stronger ESG firms outperformed during the COVID-19 crisis. According to the author, it could be explained by the fact that a superior corporate sustainability footprint protected company value in countries with relatively lower national attention to sustainability and lower safeguards in healthcare. Therefore, the capacity of strong ESG firms to serve as “rainy day assets” is geography dependent, meaning that international business resilience cannot overlook the spatial dimension.

Another distinct finding is that the global evidence for the resilience of strong ESG firms in the bond market is stronger than for stocks. This might be explained by the fact that bond markets are dominated by institutional investors, which may be more aware of ESG resilience effects.

The results suggest that it is the social capital built by companies having a strong sustainability performance that allows them to fare better in times of exogenous shocks. During fierce and unexpected crises, a firm’s ability to protect employees’ health and working conditions is particularly relevant, and such elements can be captured by ESG scores.

Financial resilience of companies is geography-dependent across asset classes

Around the world, are companies with better ESG performance more resilient to external shocks? As we have seen, the answer isn’t always “yes”. As a matter of fact, financial resilience of strong ESG firms is not a consistent international phenomenon.

In North America, the stocks as well as the CDS and bonds of ESG companies outperformed during the COVID-19 crisis. But this was not the case in the other countries analyzed by the study. How can this be explained? A deeper analysis revealed that a superior corporate sustainability footprint protected firm value in countries with lower national consideration to sustainability and lower safeguards in healthcare. This points towards a substitution effect between firm-level social capital and country-level safety nets. However, more research is necessary to fully understand the drivers of these kinds of geographic variations.

Ultimately, the resilience of strong ESG firms in times of crisis is not a hard rule, as it varies considerably across regions and countries. But this does not mean that companies should stop paying attention to ESG concerns, as doing so has many proven benefits: improving financial performance, gaining a competitive edge, creating value and making a positive impact on the environment, just to name a few.

Conclusion

For the past few years, many studies have shown that companies with strong ESG policies are associated with better performance (4). It is also true when crisis strikes : recent findings have supported the view that companies with higher ESG practices are more financially resilient, as we have seen during the COVID-19 pandemic. However, this resilience is not a universal phenomenon. It actually appears to be geography-dependent across asset classes.

These thought-provoking findings certainly open future avenues of research to academia as well as financial regulators. But they also shed light on the unexplored interaction between corporate and national sustainability performance, calling for further exploration of the cartography of sustainable businesses.

References

(1) Gianfrate, G., Rubin, M., Ruzzi, D. et al. On the resilience of ESG firms during the COVID-19 crisis: evidence across countries and asset classes. Journal of International Business Study 55, 1069–1084 (2024) - https://doi.org/10.1057/s41267-024-00718-2

(2) Lins, K.V., Servaes, H. and Tamayo, A. (2017), Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility during the Financial Crisis. The Journal of Finance, 72: 1785-1824 - https://doi.org/10.1111/jofi.12505

(3) Rui Albuquerque, Yrjo Koskinen, Shuai Yang, Chendi Zhang, Resiliency of Environmental and Social Stocks: An Analysis of the Exogenous COVID-19 Market Crash, The Review of Corporate Finance Studies, Volume 9, Issue 3, November 2020, Pages 593–621 - https://doi.org/10.1093/rcfs/cfaa011

(4) How do ESG goals impact a company’s growth performance? (2023), by Rebecca Doherty, Lucy Pérez, Kate Siegel and Jill Zucker, Mc Kinsey- https://www.mckinsey.com/capabilities/growth-marketing-and-sales/our-insights/next-in-growth/how-do-esg-goals-impact-a-companys-growth-performance

Photo by Rahul Saraf via Unsplash