The Efficacy of “ESG” Vaccine: Does it Help Investors in Fight Against the Covid-19 Pandemic?

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As many traditional investors consider augmenting their asset allocation with environmental, social, and governance (ESG) scores, assets under management in socially responsible funds have grown dramatically (Pastor et al., 2019, Pedersen et al., 2020). While there is a growing debate over the benefits and cost of ESG investing in recent years (Cornell, 2020; Dumitrescu et al., 2020; Madhavan et al., 2020), scholars and investment community are yet to firmly establish how important the ESG factors are for investors. Now, more than ever, with the heightening public attention to issues such as social injustice, climate change, etc., many companies are going woke. This means that there is a larger ESG-based investment opportunity set available to investors than ever before. It is thus, but, natural to wonder: Did the Covid-19 pandemic have an impact on investors’ attention to the ESG information? With the pandemic-induced market downtrend and accompanying high market volatility, there was certainly a conducive environment for possibly a dramatic shift in investors’ preferences. Has the pandemic further accelerated ESG investing because investors are demanding more stocks of companies that respond to the crisis by focusing on long-term goals, rather than prioritizing near-term profit at all costs?

Historically, investors’ prudence tends to be at its peak during the times of financial crises. This creates new investment opportunities as investors adjust their risk appetite by accounting for newer information made available due to heightened market sensitivity. In a recent paper, we find that the 2008 global financial crisis acted as a catalyst in affecting the investors’ behavior toward firms’ governance structures (Dumitrescu and Zakriya, 2020a). In particular, we show that the price informativeness of good governance stocks increases and that of poor governance ones decreases following the 2008 crisis. Thus, unlike the pre-crisis period when good governance stocks outperformed the poor governance, after 2008 the poor governance stocks outperform. This is mainly driven by investors’ returns expectations and governance preferences adjusting for the premia associated with poor governance.

Unlike the 2008 crisis that was borne out of super-leveraged financial instruments, the recent public health crisis and its resultant economic contraction has directed a lot of attention to socially responsible corporate behavior. For example, in March 2020, Tesla had to halt production at its California factory as it faced public and media backlash for continuing operations while the Covid cases surged in the state (Powell, 2020). Similarly, throughout the pandemic, Amazon has faced backlash over its inability to implement adequate safety measures to keep its employees safe. Thus, it is but natural to see that in a recent J.P Morgan survey of fund managers from 50 major institutional investors, “some 71% of respondents responded that it was “rather likely,” “likely,” or “very likely” that the occurrence of a low probability/ high impact risk, such as COVID-19, would increase awareness and actions globally to tackle high impact / high probability risks such as those related to climate change and biodiversity losses.” Moreover, majority of these investors believed the pandemic will act as a positive catalyst for ESG investments.

Consistent with this view, Pastor and Vorsatz (2020) show that investors show greater preferences for high sustainability and SRI funds during the Covid-19 crisis than the pre-crisis years. This impact the crisis on investors’ preferences is also visible when fund flows are examined separately for institutional and retail investors (Döttling and Kim, 2020). So, it’s not surprising to see that in its latest investment report, Blackrock informs institutional clients about ESG resilience as they have “observed better risk-adjusted performance across sustainable products globally, with 94% of a globally-representative selection of widely-analyzed sustainable indices outperforming their parent benchmarks” in the first quarter of 2020. Bloomberg analytics show that the ESG ETFs’ inflows have almost tripled to $22 billion in the first three quarters of 2020 when compared to the 2019 figures.

The Covid-19 crisis has also intensified the debate about the trade-off between sustainability and the financial performance of these investments. An important question is why do ESG investments fare relatively better than the traditional investments during the pandemic. CSRoriented firms had better return and lower stock volatility during the first quarter of 2020 (Albuquerque et al., 2020). Similar evidence was also seen during the 2008 global financial crisis (Lins et al., 2017). With the advent of Covid-19 crisis, the public awareness and political debate has gradually shifted from environmental issues and climate change to the social dimension of ESG with issues such as healthcare, worker welfare, and furloughs taking the center-stage. For instance, the ISS ESG survey of 65 global asset managers in the third quarter of 2020 found that a majority of respondents (62.5%) said the social aspect of ESG — such as labour employment support and employees’ health and safety — is gaining more traction since the pandemic began (ISS, 2020).

Companies have tried to improve their reputation by offering social services to help communities fight, protect, and recover from Covid-19. Tech giants like Google, Microsoft, Netflix, Facebook and Amazon have all committed sizable amounts of funds towards humanitarian relief, economic recovery schemes, employee and community support, and infrastructure or equipment support. Others such as Nike, Hilton, Airbnb, Uber, and Target have responded by offering in-kind support to frontline healthcare workers and medical professionals. This shift, in turn, has important implications for firms’ financial performance. In a recent paper, we show that firms’ CSR activities (or, ESG performance), and especially its social aspects, are evidently important in mitigating investors’ downside risk while also having positive value implications (Dumitrescu and Zakriya, 2020b). Specifically, we find that crash risk mitigation from the firm’s overall CSR performance, and more so from the social CSR dimension, is largely restricted to undervalued firms (as highlighted in the following two plots).

Taken together, these results suggest that risk mitigation could be an important channel through which social ESG characteristics may benefit the firms and their investors. Moreover, while we also find that the importance of social CSR dimension (out of the three i.e., environmental, social, and governance) for investors’ downside risk perseveres before, during, and after the 2008 financial crisis, risk mitigation from environmental and governance characteristics get highlighted during the crisis years. We can expect similar response to ESG characteristics of firms during the Covid-19 crisis as well.

On comparing the returns for S&P 500 Index and the S&P 500 Socially Responsible Index over the last three years, the outperformance of ESG-focused index can be seen to be distinctly exaggerated following the onset of the Covid-19 crisis. The S&P 500 Socially Responsible Index shows a cumulative outperformance of almost 1.5% annually over these three years, with a large portion of returns concentrated during the months of growing Covid-19 pandemic. Together, these trends support the idea that the pandemic has indeed positively impacted investors’ attention to ESG information. This is most likely driven by increased propensity of companies to indulge in activities showcasing positive social intent (and, hence, social ESG aspects) especially in response to the pandemic that may have also impacted investors’ ESG preferences. Essentially, we can thus safely assume that ESG investments are here to stay and may, indeed, eventually lead to long-term benefits not only for the investors, but also for the society.


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