Is Corporate Social Responsibility investing a free lunch? The relationship between ESG, tail risk, and upside potential of stocks before and during the COVID-19 crisis☆

https://doi.org/10.1016/j.frl.2021.102499Get rights and content
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open access

Highlights

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    The paper analyzes whether corporate social responsibility is beneficial for investors.

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    The sample consists of 5,073 stocks listed on 10 stock markets between January 2018 and October 2020.

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    Good ESG performance mitigates financial risk, particularly during the COVID-19 pandemic crisis.

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    Stocks with higher ESG have lower downside risk, but also lower upside reward potential.

Abstract

Did Corporate Social Responsibility investing benefit shareholders during the COVID-19 pandemic crisis? Distinguishing between downside tail risk and upside reward potential of stock returns, we provide evidence from 5,073 stocks listed on stock markets in ten countries. The findings suggest that better ESG ratings are associated with lower downside risk, but also with lower upside return potential. Thus, ESG ratings helped investors to reduce their risk exposure to the market turmoil caused by the pandemic, while maintaining the fundamental trade-off between risk and reward.

JEL classification

D22
G11
G14
G32

Keywords

ESG
COVID 19
Downside risk
Upside potential
Sustainalytics
Financial markets

Cited by (0)

☆

We thank two anonymous reviewers and the guest editor Maria Giuseppina Bruna for helpful comments and insightful suggestions. We also thank Almas Heshmati, Christopher Baum, Eva Alfredsson and Henrik Hermansson for their discussions, as well as seminar participants at The Swedish Agency for Growth Policy Analysis, Stockholm 2021 and Royal Institute of Technology 2021 for helpful comments and suggestions. The usual disclaimer applies.

© 2021 The Authors. Published by Elsevier Inc.