Weathering the Storm: ESG and Stock Performance in Europe During Times of Crisis

Abstract

This study examines the effect of ESG on stock returns in Europe during times of crisis. The financial crisis of 2008-2009, COVID-19, and the war in Ukraine crises are studied. Comparing these three significant crises, I find that ESG ratings and pillars do not consistently protect firms or investors with higher returns during these times. For the financial crisis – inspired by Lins et al. (2017) methodology - I find no significant effect of ESG on returns. However, a small positive relation is present, which becomes significant when isolating the ESG pillars. Contrary to the overall ESG rating, the social pillar seems to have a positive impact during the crisis, which is supported by Lins et al. (2017) of CSR having similar effects in low trust environments. During COVID-19 market crash and recovery, ESG has a statistically significant negative impact on returns, driven by the governance pillar. After the market crash, during the recovery period, the governance pillar turns positive, while the social pillar becomes the one driving the negative effects of ESG. Lastly, for the war in Ukraine crisis, ESG seems have to a weak positive relationship with returns, which however disappears when controlling for firm-specific financial health variables. The positive effect only grows in significance, after the fact, in the recovery period. The findings suggest that the effect of ESG largely depends on the crisis at hand. ESG ratings and separate pillars do not show a consistent impact throughout the crises. Thus, implying that ESG ratings do not lead to stock overperformance in times of crisis.