Assessing Financial and ESG Outcomes of Sustainable Firms During the COVID-19 Crisis

Abstract

The COVID-19 crisis is an independent shock that generates a rare opportunity to study how markets and firms react in a short span of time. Although previous research has shown a positive relationship between stock returns and sustainable practices during the pandemic, it has not considered how those practices impact other environmental, social and governance (ESG) outcomes. Corporate sustainable practices could be a competitive advantage that enhance performance during a crisis, thus aligning sustainable development and shareholder value. I investigated how the COVID-19 crisis has differentially affected sustainable and less sustainable companies by exploring a wide scope of outcomes, including operating profit margin, market capitalization, employment, CO2 emissions, and controversies. I hypothesized three relevant associations: the COVID-19 crisis had a direct negative effect on firm performance during 2020; ESG leaders had a better performance than their counterparts on the outcomes studied pre-COVID-19 crisis; and sustainable practices of ESG leaders moderated the negative effects of the pandemic on firm performance. I compared the performance of companies with higher levels of sustainable practices (ESG leaders) and lower levels (ESG laggards), based on their scores in the Thomson Reuters Eikon Refinitiv ESG Ratings databases. I used a Differences-in-Differences approach and a panel dataset of more than 9,000 companies and 11 years. To test my hypotheses, I conducted multiple regression analysis with industry fixed-effects. My empirical results confirmed that sustainable firms were able to ameliorate the negative impacts of the COVID-19 crisis in selected outcomes. While sustainability practices did serve as a buffer against the COVID-19 losses in operating profit margin, they aggravated the decreases in market cap brought by the crisis. Both financial effects dissipated over time. While the study was not able to detect a statistically significant moderating effect of ESG practices on employment levels, the magnitude of the estimated parameter is substantial, completely offsetting the negative effects of the crisis. On the other hand, the moderating effect of ESG practices on CO2 emissions was not statistically significant and did not have a substantive magnitude. Finally, the reduction in controversies that characterized the whole market was even stronger for ESG leaders. As an additional analysis, I developed a case study for a particular sustainability practice: board gender diversity, which is recognized as a tool to enhance firm’s value and performance by adding new skills and views. The data showed that companies with more diverse boards were able to ameliorate the effects of the pandemic in their employment levels and were able to achieve a higher reduction on their CO2 emissions than companies with less diverse boards. This study contributes to the existing literature by adding evidence on non-financial outcomes in times of crisis, by focusing on the interaction of three variables (ESG practices, COVID-19, and the outcome), and by expanding the analysis to specific sustainable practices, such as board gender diversity. Robust evidence on the effects on sustainability practices on financial and non-financial outcomes could be of interest to multiple stakeholders, including the private sector, investors, and the public sector, facing the ongoing crisis or a future one.