ESG as a "Safe Haven": An Analysis of ESG Ratings and Stock Returns During the COVID-19 Stock Market Crash

Abstract

High-rated Environmental, Social, and Governance (“ESG”) stocks have historically proven higher raw and abnormal returns compared to low-rated ESG stocks in times of crisis. Motivated by the exogenous and uncertain nature of the COVID-19 stock market crash, this crisis provides a unique opportunity to test whether high-rated ESG stocks consistently managed to exhibit systematic resilience. The extraordinary characteristics of the COVID-19 stock market crash further created an inimitable occasion to question how high-ESG stocks reacted within the initial crash but also the subsequent period, the post-crash, when the market turned optimistic whilst the COVID-19 virus continued to spread. Coupling ESG-ratings from Refinitiv with the S&P 500, we apply the Difference-in-Differences methodology to scrutinize the causal link between the COVID-19 crash and post-crash and the return for the high-rated ESG stocks. We confirm that high-rated ESG stocks performed relatively better during the COVID-19 stock market post-crash as opposed to low-rated ESG stocks. Furthermore, we demonstrate the importance of decomposing ESG into the three separate pillars; Environmental, Social, and Governance as the results of the three pillars diverged. With the nature of the crisis originating from health concerns, we discover that in the crash period the Social pillar showed the highest economic and statistically significant raw and abnormal returns of the three pillars.