Responding to widespread assertions of ESG as a stock market resilience factor, which purportedly have contributed to record inflows into sustainable/ESG funds this year, a recent academic study: "ESG Didn’t Immunize Stocks Against the Covid-19 Market Crash" of 1,653 US companies tested ~January - March 2020 (a period of stock market decline of 34% among the S&P 500) and ~April - June 2020 (Q2 market "recovery period") to determine the impact of ESG as a proxy for resiliency in times of crisis concluded that companies' ESG performance* had a statistically insignificant association with stock market performance in the Q1 period of market decline (i.e., did not support greater stock price resilience), and was negatively associated with returns during the Q2 market recovery period (i.e., highly rated ESG companies performed worse than their lower rated peers).
Controlling for numerous factors including accounting-based measures of financial performance, liquidity, leverage, intangible asset investments, variables capturing institutional investor interest and shareholder orientation, and company age, market share, and industry affiliation, as well as market-based variables that impact returns, the study found that returns were associated with the companies' industry affiliation, traditional market-based measures of risk (e.g., book-to-market ratio, prior stock price momentum, idiosyncratic risk), traditional accounting-based measures of financial flexibility (e.g., liquidity and leverage), and investments in internally-developed intangible assets, aka, innovation-based assets (e.g., R&D, brands, employee training, business processes) - not ESG considerations.
The study's authors distinguish their analysis from other studies that characterize ESG as a downside risk mitigator based on their use of controls that were not used in the other studies; more specifically, while the current study controlled for traditional market-based measures of risk and numerous other relevant variables that serve to reduce bias and promote determinations of causation, the others purportedly did not. The authors conclude: "The extensive analyses presented in this study suggest that the celebration of ESG as a resilience factor in times of unexpected crisis is, at best, premature, or at worst, misplaced… Overall, our study provides robust evidence to refute the widespread claim that ESG is a significant share price resilience factor during the COVID-19 global crisis."
*For purposes of the study, companies' ESG activities and performance were based largely on ESG scores from Refinitiv’s EIKON database, supplemented with MSCI data, which perhaps merely highlights (among other things) the concerns around the use and reliance of ESG ratings as a proxy for companies' performance on environmental, social, and governance issues, and associated pressures on companies to boost their ratings solely to garner proxy advisor and investor proxy voting or other support.
See these articles: "ESG 'not a factor' in share price resilience during Covid-19 crisis" (Board Agenda), "US Stocks With Higher ESG Scores Have Lower Returns" (Traders Magazine), "Academics Attack ESG for Failure to Outperform During Crisis" (Institutional Investor); these prior reports: "ESG Disclosure: SEC Chair Clayton Speaks!," "SEC's Peirce Likens ESG Ratings to the Scarlet Letter," and "Boston Trust Walden Criticizes ESG Ratings"; and "Funds branded ‘ESG’ are laden with technology stocks" (Financial Times), "ESG Investing in the Pandemic Shows Power of Luck" (WSJ), and "Barclays launches systematic study of ESG-focussed US equity funds" (Institutional Investor) (study results here). This post first appeared in the weekly Society Alert!