Academics Attack ESG for Failure to Outperform During Crisis

A new study refutes “widespread claims” that environmental, social, and governance considerations improved stock performance during the pandemic.

Cate Dingley/Bloomberg

Cate Dingley/Bloomberg

In the aftermath of March’s coronavirus crash, numerous fund managers and data providers determined that companies with high ESG scores outperformed during the rapid sell-off — and a surge of money followed into funds focused on environmental, social, and governance issues.

A new academic study, however, raises questions about the link between ESG considerations and stock performance during crises.

Researchers from Canada’s University of Waterloo, Tilburg University in the Netherlands, and New York University’s Stern School of Business challenged the “widespread claims by fund managers, ESG data purveyors, and the financial press” that companies with high ESG scores were better situated in the pandemic. In particular, the authors — Elizabeth Demers, Jurian Hendrikse, Philip Joos, and Bauch Lev — cited reports from BlackRock, Morningstar, and MSCI, which all found that ESG funds outperformed during the crash.

BlackRock, for instance, reported its sustainable funds achieved better risk-adjusted returns during the first quarter, while 24 of 26 ESG-tilted index funds tracked by Morningstar also outperformed their “closest conventional counterparts,” according to the analytics firm.

According to the academics, however, ESG scores “offer no such positive explanatory power for returns during Covid-19.”


“ESG is not an ‘equity vaccine’ against declining share prices in times of crisis,” Demers and her co-authors argued. “Following all this hyping of ESG as downside risk protection, there was no surprise in CNBC’s report that the first quarter of 2020 saw record inflows into sustainable funds.”

Instead of ESG, they found that stock movements during the first quarter appeared to be driven by firm leverage and cash positions, as well as industry sectors and market-based measures of risk. Returns were also positively associated with measures of intangible assets, according to the study.

“These results suggest that innovation-related assets rather that social capital investments offer the greater immunity to sudden, unanticipated market declines,” the authors wrote.

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Looking beyond the initial crash in March, the researchers found that ESG factors were negatively associated with returns during the recovery in the second quarter, while investments in innovation-related assets continued to positively impact performance. “Not only did more socially responsible firms not exhibit the alleged greater share price resilience during the highly unexpected Covid-induced market decline, but they actually performed significantly less well when the overall market recovered,” they wrote.

Including the 2008 financial crisis, the authors determined that liquidity and intangible assets were the best predictors of returns during crisis periods, rather than ESG factors.

“While our results don’t speak to the longer-term shareholder value creation of responsible corporate citizenship, an approach to doing business that we generally support and advocate for, they do provide robust evidence that firms with higher ESG scores do not experience superior returns (i.e., smaller losses) during the pandemic-induced selloff in the first quarter of 2020,” the authors concluded.