Corporate social responsibility and firm performance: The value of ESG during market shocks in Europe

Abstract

This thesis examines the relationship between a firm’s environmental, social, and governance score and its stock performance during market shocks in Europe. We study two crises, the financial crisis of 2008-2009 and the COVID-19 crisis. Previous studies find a positive effect of ESG on the firm performance during the financial crisis in the U.S. market (Lins et al., 2017) which implies the importance of trust during times of crisis. We observe a positive relationship between a company’s ESG score and its stock returns during the financial crisis, which is in line with Lins et al. (2017). We find evidence that the firms with high ESG ratings outperform the firms with low ESG ratings by at least three percentage points during the crisis. We isolate the positive impact to the social pillar which reflects trust towards the company. On the other hand, during the COVID-19 crisis, we find a negative effect between a company’s ESG score and stock returns, which is isolated to the governance score. According to the trust hypothesis, it is expected that we do not find a positive effect during the COVID-19 crisis as firms did not experience a significant decline in trust during the COVID-19 crisis period. However, the negative effect of the governance pillar is something to be discussed in future studies. The results suggest that the positive effect of ESG on crisis period performance is unique to crises where overall trust in businesses is low.