The onset and impacts of the COVID-19 crisis offered a trial by fire of socially responsible investing and the increased focus on ESG goals in addition to financial performance and total shareholder return.
A recent article by Professor Elizabeth Demers specifically examined whether ESG factors fortified stock values during the COVID-19 pandemic. The paper contrasts two opposing views of ESG: (1) companies with strong ESG performance will receive downside protection as stakeholders such as customers and employees are willing to support them through a crisis; and (2) executives will focus on ESG to build their reputations to the detriment of financial results and shareholder returns.
To test the theory, the study examined high performing ESG companies during the sharp downturn as COVID hit and then the stock market recovery as well as back-testing for share performance during the 2008-09 global financial crisis. During the downturn, strong ESG performance provided 1% of variability while during the recovery, investment in innovation and internal, intangible assets accounted for more growth than strong ESG performance.
Importantly, the author acknowledges that the study did not evaluate correlation between ESG performance and long-term shareholder returns, nor does the author propose that corporations should not be run in a socially responsible manner. Rather, current discussions regarding ESG’s ability to protect share values during a crisis may be overstated.
