ALMA MATER STUDIORUM – UNIVERSITA’ DI BOLOGNA

DEPARTMENT OF STATISTICAL SCIENCES

Second Cycle Degree

In

QUANTITATIVE FINANCE

The Resiliency of Environmental and Social Stocks in Time of Crisis:

Evidence from Europe during the Outbreak of COVID-19 Pandemic

DEFENDED BY SUPERVISOR

Giammarco Pallini Prof. Massimiliano Barbi

Matr. Number: 926961

Graduation session: March 2022

Academic year 2020/2021

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 Abstract

This thesis studies the impact of firms' environmental and social policies on stock returns
during the 2020 market crash, caused by the exogenous shock of the global pandemic that
emerged during the first quarter of 2020. Past research has already provided theories and
empirical evidence on the outperformance of the stock market, during market crises, for
companies that are observed to be more environmentally and socially responsible. This thesis
shows that European companies with higher social and environmental performance achieve
higher returns during COVID-19 market crashes, but the same is not true during "normal"
periods. The same cannot be said for good corporate governance practices, which are
confirmed as a negative factor on European stock returns. These results suggest that investors
could make their portfolios more resilient to large market crashes by buying shares of
companies with high environmental and social performance, thus obtaining a form of
protection from responsible investment. However, comparing the degree of resilience of
European equities during a crash with that of US equities, we observe a clear difference in
favour of the latter.

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Table of Contents
1. Introduction ……………………………………………………………………………… 5
1.1 Socially Responsible Investing development……………….……………….……….. 5
1.2 SRI strategies ………………………………………………………………………... 9
1.3 What are ESG ratings? ………………………………………………………………. 11
1.4 ESG ratings weaknesses ……………………………………………………………... 13
2. Literature review and hypothesis development ………………………………………….. 18
2.1 ESG streams of study ………………………………………………………………… 18
2.2 ESG investing and COVID-19 pandemic ……………………………………………. 24
2.3 ESG investing: US vs Europe ………………………………………………………... 27
3. Data and methodology …………………………………………………………………… 32
3.1 Data source …………………………………………………………………………... 32
3.2 Sample description …………………………………………………………………… 34
3.3 Empirical analysis ……………………………………………………………………. 39
3.3.1 Cross-sectional regressions …………………………………………………... 39
3.3.2 Time-series cross-sectional regressions ……………………………………... 40
3.3.3 Difference-in-differences regressions ………………………………………. 41
4. Results …………………………………………………………………………………… 43
4.1 Results of cross-sectional regressions ……………………………………………..… 43
4.2 Results of time-series cross-sectional regressions …………………………………… 45
4.3 Results of difference-in-differences regressions …………………………………….. 46
5. Robustness tests ………………………………………………………………………….. 49
5.1 Crisis period vs ‘normal’ period …………………………………………………...… 49
5.2 Including the Governance pillar ……………………………………………………… 53
5.3 Eurozone and most important countries sub-analysis ………………………………... 57
6. Discussion of results ……………………………………………………………………… 63
7. Conclusion ………………………………………………………………………………... 65
References ……………………………………………………………………………………... 67
Appendix ………………………………………………………………………………………. 74

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Tables and Figures

Table 1 Refinitiv weights for ESG Pillars and sub-categories ………………………………… 33

Table 2 Summary statistics ………………………………………………………………... 38
Table 3 Cross-sectional regressions for quarterly abnormal returns …………………………….. 44
Table 4 Cross-sectional regressions for daily abnormal returns ……………………………… 45
Table 5a Difference-in-differences regressions for daily abnormal returns – First Quartile for
ES_TopRanked variable ………………………………………………………………………… 47
Table 5b Difference-in-differences regressions for daily abnormal returns – Second Quartile (median) for
ES_TopRanked variable …………………………………………………………… 48
Table 6a Cross-sectional regressions for quarterly abnormal returns – first quarter of 2019 …. 50
Table 6b Cross-sectional regressions for quarterly abnormal returns – first quarter of 2021 …. 50
Table 7a Cross-sectional regressions for daily abnormal returns – first quarter of 2019 ……… 52
Table 7b Cross-sectional regressions for daily abnormal returns – first quarter of 2021 ……… 52
Table 8 Cross-sectional regressions for quarterly abnormal returns on ESG score ……………. 54
Table 9 Cross-sectional regressions for daily abnormal returns on ESG score ………………… 55
Table 10 Difference-in-differences regressions for daily abnormal returns – ESG analysis ...…. 56
Table 11a Cross-sectional regressions for quarterly abnormal returns – Eurozone …………… 58
Table 11b Cross-sectional regressions for quarterly abnormal returns - Most important Eurozone
countries in terms of GDP (France, Germany, Italy, Netherlands, Spain) …………………….... 59
Table 12a Cross-sectional regressions for daily abnormal returns – Eurozone ………………... 60
Table 12b Cross-sectional regressions for daily abnormal returns - Most important Eurozone countries in
terms of GDP (France, Germany, Italy, Netherlands, Spain) ……………………… 60
Table 13 Difference-in-differences regressions for daily abnormal returns – Eurozone (column 1) - Most
important Eurozone countries in terms of GDP (column 2) ……………………………… 62

Figure 1 History of socially responsible investing in the United States………………………..... 6

Figure 2 ESG Rating – Gaussian mapping ……………………………………………………… 13
Figure 3 ESG Rating disagreement – comparison with credit rating …………………………… 17
Figure 4 The market of ESG investing at the start of 2018 ………………………………... 28
Figure 5 Annualized return of Q1 − Q5 long-short portfolios (North America) ……………… 29
Figure 6 Annualized return of Q1 − Q5 long-short portfolios (Eurozone) ……………………. 30
Figure 7 Companies’ distribution across most representative countries …………………… 35
Figure 8 Companies’ distribution across sectors …………………………………………... 36
Figure 9 STOXX 600 index level from 01.02.2020 to 03.31.2020 ……………………...…... 37

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 1. Introduction

1.1 Socially Responsible Investing development

The earliest forms of socially responsible investment can be traced back to colonial times (18th
century) in the United States when some religious groups refused to invest their endowment funds
in the slave trade and in companies manufacturing liquor or tobacco products or promoting
gambling. They were followed in 1898 by the Quakers, another Protestant denomination, who
forbid investments in slavery and war. Eventually, in 1928, a group in Boston founded the first
publicly offered fund, the Pioneer Fund, which had similar restrictions 1. Socially responsible
investing ramped up in the 1960s, when Vietnam War protestors demanded that university
endowment funds no longer invest in defense contractors. In the process, several success stories
emerged. In 1977, Congress passed the Community Reinvestment Act, which forbade
discriminatory lending practices in low-income neighborhoods. Repercussions from Chernobyl and
the Three Mile Island nuclear disaster in the 1980s spawned anxiety over the environment and
climate change, which led to the launch of the U.S. Sustainable Investment Forum (US SIF) in
1984. Then, apartheid in South Africa became an impetus to force corporations to divest from
South Africa. Apartheid—literally meaning “separateness”—was designed not only to keep the
country’s non-white majority apart from the white minority but also to decrease black South
Africans’ political power. The Act forced black Africans to live in reserves and barred their
working as sharecroppers. In 1985, students at Columbia University in New York organized a sit-
in, demanding that the University cease its investing in companies doing business with South
Africa. The combined efforts of protests and responsible investing paid off—$625 billion in
investments was redirected from South Africa by 1993.

Eventually, the long-standing principles of socially responsible investing came to represent a

consistent investment philosophy allied with investors’ concerns. These ranged from avoiding the
slave trade, war and apartheid, and supporting fair trade, to issues more common today concerning
the ethical impact of environment, social, and corporate governance (ESG). Therefore, since the
20th century social responsible investment (SRI) has started to take hold as a specific investment
philosophy.

1
https://www.investopedia.com/news/history-impact-investing/

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Figure 1
History of socially responsible investing in the United States

Source: Thomson Reuters, “History of socially responsible investing in the U.S.”, August 2013

Nowadays, the terms socially responsible investment (SRI), mission-related investing, impact
investing and environmental social and governance investment (ESG) have become a familiar part
of the vocabulary of all financial market participants. These investment approaches are usually
grouped together under the title of responsible investment but, at the same time, they differ
substantially and pursue different objectives. Socially responsible investing (SRI) refers to a
portfolio construction process that aims to avoid investments in certain stocks or industries through
negative screening according to defined ethical guidelines; mission-related and impact investing
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 refer to investing in projects or companies with the explicit objective of achieving environmental
or social change; environmental, social and governance (ESG) investing refers to the integration of
factors that measure the sustainability of an investment into fundamental analysis to the extent that
they are material to investment performance 2. The ESG investing approach is often summarized as
“doing well by doing good” in the sense that it aims to improve investment performance while
trying to achieve social objectives. The theoretical base of this view is encapsulated into the
‘Stakeholder theory’ (Freeman 1984) according to which companies must take social and
moral responsibilities towards the public and society and their responsibility is to maximize
different stakeholders’ interests (employees, customers, shareholders, society as a whole).
Another view is predicated on the ‘Shareholder theory’, usually attributed to Friedman (1970)
which states that companies have no social responsibility to the public or society and their
only responsibility is to maximize profits for their shareholders. The latter can now be
considered outdated. This is because in the process of transition to sustainable development,
finance plays a key role that has marked the shift from an exclusive focus on maximizing profit
and shareholders’ wealth to an increasing focus on environmental issues such as the green and
low-carbon economy and the climate change adaption and mitigation 3.

SRI investing has long been the most widely used of the three approaches, but in recent years it has
been felt that negative screening alone is too restrictive. It must be said for the sake of clarity that
SRI is not considered by everyone to be an investment strategy in its own right. In fact, some people
use SRI as a generic term for those investment whose classical financial perspective is combined
with sustainability-related objectives 4. According to this definition, ESG integration is an asset
management strategy which allow this type of SRI investment to be made. In any case, since the
ESG principle was formally proposed in 2004, it has become increasingly popular 5. In 2006, the
United Nations enhanced the Principles for Responsible Investment (PRI), a set of practical
standards offered for voluntary adoption by investors. This effectively formalized the link between

2
https://www.commonfund.org/blog/post-responsible-investing-terminology-background
3
Ryszawska B. (2016) “Sustainability transition needs sustainable finance”, Copernican Journal of Finance
and Accounting, Vol.5 No.1, pp.185-194.
4
For example see Michelson et al, 2004
5
According to recent estimates, more than $30 trillion in assets under management are invested applying
ESG criteria in investment and portfolio selection (GSIA 2018).

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 ESG factors and investment performance. The message that is indented to be conveyed to investors
through these PRI is to consider ESG factors to the extent that they are relevant to the investment
performance of a particular portfolio. This means that investors are encouraged to analyze ESG
issues alongside traditional risk and opportunity indicators when making an investment. This
combination of traditional risk and performance indicators with ESG factors is certainly
determinant in the development of more sustainable finance 6 which, in turn, is crucial for the
sustainability of society as a whole7.

As far as Europe is concerned, the objective of the Europe Commission is to make Europe a
climate neutral continent and do it by 2050 (European Green Deal). So, the European
Commission is taking several steps to promote the integration of ESG parameters into all
aspects of the financial system, with an increasing emphasis on financial sustain ability issues.
Since 2012, with the introduction of the KIIDs - Key Investor Information Documents by the
European Parliament, asset management companies are invited to integrate information on
ESG parameters into their documentation in order to offer it to investors who can then use it
in their investment choices 8. In 2014, the EU with the enactment of the Non-Financial
Reporting Directive (2014/95/EU) that requires some large companies, including banks, to
disclose information on how they operate and manage social and environmental challenges.

More recently, a group of technical experts on sustainable finance has been appointed to assist
the European Commission in the development of a sustainable EU regulation. Such regulation
will include: an EU taxonomy for environmentally, an EU standard for Green Bonds to ensure
comparison and transparency, methodologies for EU climate benchmarks and guidelines to
improve corporate disclosure on climate-related information. The path taken by the European
Commission will inevitably spill over the activity of banks, involving the supervisory
authorities. Already in 2019, the European Banking Authority explained how banks will soon
integrate ESG parameters into their risk processes and lending policies to address transiti onal
and physical risks understood respectively as the potential financial loss that may result from
the process of adaption towards more environmentally sustainable practices and the financial

6
World Economic Forum, 2011; Eurosif, 2016
7
Bouma et al., 2017
8
Jebe R. (2019); Sciarelli, Cosimato, Landi and Iandolo (2021) investigate the role KIIDs play in
investor decision-making.
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impact due to climate change. In November 2020, The European Central Bank then announced
that the bank stress tests to be held in 2022 would also include consideration of climate-related
risks. These observations suggest that ESG activities will therefore become strategic for both
banks and public authorities.

1.2 SRI strategies

Socially responsible investing involves several strategies, in particular seven key strategies:
exclusion/negative screening; selection/positive screening; ESG integration; impact investing;
engagement; norms-based screening; thematic/sustainability themed investing.

Negative Screening is the traditional and most common approach which excludes individual
companies or entire industries from portfolios if their areas of activity conflict with an investor’s
values. This process can be quite flexible as it can rely either on standard sets of exclusion criteria
or be tailored to investor preferences. For instance, investors may wish to exclude companies with
sales generated from alcohol, weapons, tobacco, adult entertainment or gambling – so-called “sin
stocks.” Some faith-based investors also exclude companies involved in contraception and
abortion-related activities. In the case of government bonds, investors may seek to avoid an entire
country based on the sovereign’s compliance with select international standards (e.g. human rights
or labor standards). In general, one of the major criticisms of this approach is that it reduces the
investable universe.

Positive screening seeks to identify companies working towards social or environmental good.
This screening uses ESG performance criteria and financial characteristics to select the best
companies within an industry or sector (best-in-class), usually relying on a sustainability rating
framework. This is usually a more knowledge-intensive process than exclusionary screening
because it requires understanding which factors are relevant for each industry and evaluating
individual issuers on each of these factors.

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 ESG integration, unlike positive screening, seeks to incorporate material ESG risks and growth
opportunities directly into traditional security valuation (e.g., through inputs such as earnings,
growth or discount rates) and portfolio construction. This approach has gained traction in recent
years and is based on the premise that additional ESG information not covered by traditional
analysis could have an impact on the long-term financial performance of a company. The explicit
inclusion by asset managers of ESG risks and opportunities into traditional financial analysis and
investment decisions based on a systematic process and appropriate research sources. This type
covers explicit consideration of ESG factors alongside financial factors in the mainstream analysis
of investments. ESG integration involves understanding how companies handle social,
environmental and governance risks that could damage their reputations and whether they are
positioned to capture ESG opportunities that could give them a competitive edge.

Impact investing are investments made into companies, organisations and funds with the intention
to generate social and environmental impact alongside a financial return. Impact investments can
be made in both emerging and developed markets, and target a range of returns from below market-
to-market rate, depending upon the circumstances 9. Impact investing explicitly seeks to generate a
positive social or environmental impact alongside a financial return, unlike other SRI approaches,
where progress on social and environmental issues may be a by-product of financial enterprise.
The niche market of impact investing is growing fast. Examples include community investing,
variants of microfinance, as well as private equity-like deals investing in such sectors as education,
healthcare, basic infrastructure and clean energy.

Shareholder Engagement recognizes that as a shareholder of a company, investors have the ability
to take an active part in the governance and activity a company employs. Shareholder influence
attempts to shift corporate behavior toward greater compliance with ESG principles. Influence can
be exerted by investors through direct communication with corporate management or by filing
shareholder proposals and proxy voting. This is a long-term process, seeking to influence behaviour
or increase disclosure. The influence of shareholder engagement on ESG issues has risen in recent
years. The majority of the proposals filed have been focused on political activities of corporations,
the environment, human rights/diversity, and governance.

9
Global Impact Investing Network (GIIN), ‘What is Impact Investing?”, http://www.thegiin.org/cgi-
bin/iowa/investing/index.html,2012
10
Norms-based screening is basically the screening of investments according to their compliance
with international standards and norms. This approach involves the screening of investments based
on international norms or combinations of norms covering ESG factors. International norms on
ESG are those defined by international bodies such as the United Nations (UN).

Thematic Investing targets specific themes such as climate change, water, human rights or gender
lens investing. For instance, using a gender lens to empower women would evaluate companies
and investment opportunities based on women’s leadership, women’s access to capital, products
and services beneficial to women and girls and workplace equity. Thematic funds focus on specific
or multiple issues related to ESG. Funds are required to have an ESG analysis or screen of
investments to be counted in this approach.

Assessments of these company-specific issues are made by Sustainability Rating Agencies (SRAs)
that provide an overall scoring of the company's ESG performance. In addition, several agencies
create indices called sustainability-themed indices or ESG indices. Relevant examples are the Dow
Jones Sustainability Index (DJSI) and the MSCI ESG Indices. Very recent (October 2021) is the
launch of the first Italian ESG index dedicated to Italian blue-chips.

1.3 What are ESG ratings?

The remarkable development of sustainable and responsible investing (SRI) in recent years
has led investors, companies, shareholders and governments to demand accurate information
on environmental, social and governance (ESG) aspects, which has become part of their
competitive strategy. According to Gilbert (2019), investor spending on ESG ratings by data
providers (i.e., ESG rating agencies) increased from $200 to $500 million between 2014 and
2018. The consequence has been the emergence and then gradual rise of ESG rating agencies,
which have become a key reference for companies and financial markets, playing a very
11
delicate role in doing their job. Sustainability rating agencies (SRAs) collect information both
directly from companies and from the public. They examine companies individually and assess
their sustainability performance using their own methodologies. ESG ratings are “evaluations
of a company based on a comparative assessment of their quality, standard or performance on
environmental, social or governance issues” (SustainAbility, 2018).

ESG scoring shall be constructed in such a way as to be sector neutral. Therefore, companies are
classified by sector, taking the best of each sector according to the ESG criteria. So, there will be
“best-in-class” and “worst-in-class”, which is different to best/worst issuer. An oil company can
therefore meet the ESG criteria while a company that deals with sustainable agriculture does not.
Once a score is assigned to the company according to the ESG criteria, this value is transformed
into a rating through a mapping function, i.e. Gaussian mapping (see Figure 2).

The purpose of ESG metrics is to capture as accurately as possible the performance of a

company on ESG issues. If this happens, investors can use the data to assess companies’
engagement with these issues and their performance, and then to integrate the data into them

business analysis. At the same time, companies will be able to understand ho w effective their
efforts are in producing results and how to systematically integrate these efforts into their
operational processes, business strategy and executive compensation plans. And the same is
true for customers when looking at these scores/ratings to guide their decisions, for employees
when choosing where to work, for controllers when monitoring companies and deciding on
incentives and sanctions, etc. (Kotsantonis S. and Serafeim G., 2019).

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 Figure 2
ESG Rating – Gaussian mapping

Source: ESG Investing: ESG Ratings - MSCI10

1.4 ESG rating weaknesses

In this development process, many changes have been experienced by the sustainability rating
agency industry. There are also many questions that have arisen around this industry and their
work. For example, one wonders what exactly is the concept of corporate sustainability that
has been consolidated with regard to ESG rating criteria in recent years, whether this concept
is shared by all the various agencies, how well they really capture the real sustainability of a

10
ESG Investing: ESG Ratings - MSCI
13
 company and, above all, whether these rating agencies are really contributing to the
achievement of a more sustainable development.

Important to note is that the ESG rating has nothing to do with the Credit Rating. This is a relative
rating with respect to the sector. The problems of this rating are many: (i) it is a relative rating, so
absolute comparison is impossible, (ii) it is not stable, since does not depend just by how the
company behave, but also from other companies, (iii) lack of ESG reporting standards and issue of
self-reporting. A widespread and proven phenomenon is that of the so-called greenwashing 11. In
the case of bond issuance, the company must use the funding obtained through the bond to improve
the ESG criteria to receive the ESG label. However, this does not in any way link the company’s
sustainability with the issued ESG bond. In fact, companies often make very misleading statements
about environmental practices, performance, or products, using incomplete documentation, trying
to obtain the ESG label, and they often succeed in that.12 These activities by company also increase
their public image, they intended to make people think that they are concerned about the
environmental, even if the real business harms the environment.

The relationship between ESG ratings and the ESG exposures of firms is investigated by Hubel
and Scholz (2020) that finding notable differences and identifying two main causes of such
discrepancies: (i) unassigned ESG risks – ESG ratings do not reflect company specific
characteristics causing a positive/negative correlation between those ESG factors and
company’s returns; (ii) industry adjustments of ESG ratings – ESG ratings provides insights
regarding the ESG performance of a company relative to its industry peers, whereas ESG
exposures deliver absolute exposures to ESG risks.

Another problem with ESG ratings is certainly that they are available for a limited number of
stocks. In particular, ESG rating agencies mainly cover large companies, resulting in a
systematic lack of small companies in ESG portfolios. In the empirical literature on equity
funds, usually 20-40% of equity portfolios remain unrated. 13 Drempetic, Klein and Zwegel

11
Greenwashing is a corporate communication strategy aimed at falsely or exaggeratedly presenting the
image of a company committed to the environment, or a strategy of presenting products with a higher
environmental performance than is actually the case. On 26 November 2021, the first precautionary order of
an Italian court on greenwashing was issued, an act that is also among the first in Europe.
12
This makes ESG ratings subject to potential greenwashing and incomplete data (Parguel et al. 2011).
13
See for example Kempf and Osthoff 2008; Auer 2016; Henke 2016; El Ghoul and Karoui 2017.

14
 (2019) find a significant positive correlation between the size of a company and the availability
of a company’s ESG data and leads them to question whether the way corporate sustainability
is measured (i.e. how ESG scores are assigned) gives an advantage to larger companies over
smaller ones that have fewer resources at their disposal.

To overcome the problem of unrated securities, authors often assume that rated securities
represent unrated securities.14 This is because neglecting unrated securities reduces the
investment universe that could impact performance due to the lack of diversification.

With regard to exclusion criteria, there seems to be a widely shared view in fact some business
fields are considered unethical by most investors. Lobe and Walkshausl (2016) talk of a ‘Sextet
of Sin: adult entertainment, alcohol, gambling, nuclear energy, tobacco and weapons’ , Eurosif
(2018) obtain similar results. These fields of activity, and therefore the companies operating
in them, are generally excluded from SRI investment indices.

Escrig-Olmedo et al. (2019) in their work explore how rating agency assessment criteria have
evolved over the past years and how these agencies worked to achieve sustainable
development, basing their analysis on a comparative study of the most representative ESG
rating agencies in the financial market. They conclude that, over time, the various ESG rating
agencies have modified their methodologies by integrating new criteria (especially
environmental and governance criteria) into their assessment model but, at the same time,
these ESG rating agencies do not fully integrate sustainability principles into the corporate
sustainability assessment process, thus limiting their contribution to the sustainable
development of the companies they assess.

Another point to reflect on is that the methodologies used by rating agencies to evaluate and
screen companies are not yet standardized in fact while financial performance indicators are
well defined, ESG performance indicators and metrics used by ESG rating agencies are quite
heterogeneous. This lack of homogeneity undermines investor confidence and can actually
lead to different outcomes that damage the social performance (and then the reputation) of the
company (Levine and Chatterji 2006). As showed by Amel-Zadeh and Serafeim (2018), the
lack of comparability of metrics across companies and across time is the most important barrier

14
See for example Wimmers 2013; Borgers et al. 2015; Ameer 2016; Auer 2016.
15
for the use of ESG data in investment decisions. At the same time, company managers may be
confused about how to prioritize their investments in ESG issues in order to improve their
company’s reputation with investors. The same academics who investigate, for example, the
various links between ESG score and the firms’ financial performance may obtain dif ferent
and biased results depending on the rating agency they use. Several studies have demonstrated
the heterogeneity of measurement approaches. Ilinittch et al. (1998) find a large unexplained
variance in environmental ratings; Delmas and Blass (2010) conduct an analysis on 15
companies in the chemical sector showing that the rating of companies varies significantly
depending on whether the screening is based on toxic emissions and regulatory compliance or
on the quality of environmental policy and disclosure; Hedesstrom, Lundqvist, Biel (2011)
compare seven European and North American sustainability analysis agencies on how they
rank the same group of companies in terms of environmental performance by analyzing two
industries (automotive and paper/forestry) nothing rather divergent results between the various
rankings and significant differences on how many and which medium and low relevance
criteria are applied; Semenova and Hassel (2014) explore the convergence validity of the
environmental ratings of different proprietary databases concluding that the ratings have
common dimensions but do not converge; Halbritter and Dorfleitner (2015) note that the effect
of ESG scores on stock returns is influenced by the rating provider used. A more recent work
is by Christensen, Serafeim and Sikochi (2020) that show how increased ESG disclosure
actually leads to greater disagreement on ESG rating instead of mitigating it. They also find
that raters disagree more about ESG outcome than input metrics.

The high degree of disagreement on ESG rating among data providers is thus a proven fact:
Sindreau and Kent (2018) in an article on Wall Street Journal emphasize how strong the
differences between ESG providers can be by comparing them with the assessment
disagreement between credit rating agencies (see Figure 3). Concerns about the apparent
disagreement in ESG rating was also expressed recently by the commissioner of the Securities
and Exchange Commission (SEC) who said “The various [ESG] ratings available can vary so
widely and provide such bizarre results that is difficult to see how they can effectively guide
investment decisions”.

16
Figure 3
ESG Rating disagreement – comparison with credit rating

Source: Sindreau and Kent (2018). Why It’s So Hard to Be an ‘Ethical’ Investor. The Wall Street
Journal. The original interactive graphic is available at: https://www.wsj.com/articles/why-its-so-hard-
to-be-an-ethical-investor-1535799601.

17
 2. Literature review and hypothesis development

In this section, a thorough literature review is developed and the hypotheses underlying my research
are formulated. Sub-section 2.1 explores the various streams of study that have developed over the
years in the literature on ESG Investing; 2.2 explores the issue of ESG performance in relation to
the COVID-19 pandemic and reports on the main studies that have already addressed it; 2.3
explores the issue of ESG Investing in relation to the comparison between the European and US
geographical areas and finally formulates the key questions and hypotheses of the thesis.

2.1 ESG streams of study

ESG issues and their link with other factors have allowed the development of an immense
amount of literature divided into various streams. One of them focuses on how companies
respond to ESG ratings in fact, it is widely accepted that companies are responsive to ESG
ratings 15. Chatterji and Toffel (2010) taking a large sample of US firms that received low
scores in environmental ratings note how these firms then improved their performance mor e
than those that were never rated or had received a better rating. The phenomenon they observed
is prevalent for companies belonging to sectors subject to stricter environmental regulations.
Slager and Chapple (2016) take as their sample all European listed companies that have been
classified by EIRIS 16 as operating in a high corruption risk environment. Approximately 57%
of the companies in the sample were included in the FTSE4Good index in the obs ervation
period from 2007 to 2010 while the remainder were not. The authors identify three
mechanisms that influence Corporate Social Performance: exclusion threats, signaling and
engagement. Also, they show that firms excluded from the FTSE4Good index following the

15
Other studies have obtained mixed or no results like Curran and Moran (2007); Takeda and Tomozawa
(2008).
16
EIRIS is an independent social research agency that collects and evaluates information from company
reports, webpages, and information directly provided by companies.

18
 introduction of new criteria were more likely to improve their performance in the following
year. Clementino and Perkins (2021) show great heterogeneity in how firms respond to ESG
ratings investigating on a sample of companies operating in Italy. They find four typologies of
company responses to ESG ratings based on interview responses: passive conformity, active
conformity, passive resistance, active resistance.

Many works dwell on the link between corporate risk and ESG factors. In general, corporate
risk can be explained as the potential of losing firm value as a result of uncertainty concerning
future outcomes or events. In general, the financial risk to the company increases as the
likelihood of civil and legal proceedings increases, and likewise with the increasing likelihood
of regulatory intervention by governments. There are many recent cases of companies
involved in lawsuits for conduct that has led to air and water pollution. The relationship i n
these cases between CSP and corporate financial risk is clear. Other implications between
social performance and risk are more indirect. For example, a low CSP level can be interpreted
as a sign of poor management because the company has not been able to acquire a positive
reputation over time and this can be perceived by potential investors and lenders as a wake -up
call for the future. It should also be considered that, as social responsibility investment screens
are increasingly used by investors, a low CSP may increase the cost of capital for the company,
and this inevitably spills over into the financial risk of the company 17. The corporate social
performance (CSP) of companies is therefore directly linked to the reputation of a company
which determines its attractiveness as an employer, and this can undoubtedly confer a
competitive advantage 18. Thus, there are many aspects explored in the literature related to the
CSP-firm financial risk relationship. Orlitzky and Benjamin (2001) conclude through meta-
analysis that corporate social performance reduces financial risk. In particular, the authors note
that a better CSP appears to lower external market-based risk relatively more than internal
accounting-based risk, i.e. that the firm's image has a more significant impact on market risk
measures than accounting risk measures. Sassen, Hinze and Hardeck (2016) study the impact
of corporate social performance on corporate risk in Europe taking a large European panel

17
For instance, Bassen et al. (2006) and El Ghoul et al. (2011) found a negative relationship between CSP
and equity costs of a company. Goss and Roberts (2011) examined the impact of CSP on the cost of US bank
loans and found that more responsible firms have lower costs.
18
Turban e Greening (1997) and Greening and Turban (2000) show that CSR might increase a firm’s appeal
as an employer and help attract and retain a high-quality workforce, suggesting that a firm's CSP can provide
a competitive advantage in attracting candidates.
19
dataset of 8,752 firm-year observations covering the period between 2002-2014. Corporate
risk is understood as idiosyncratic, systemic and total risk. The authors show that the aggregate
ESG score decreases total and idiosyncratic risk while the social factor decreases all three risk
categories. Gangi, Meles, D’Angelo and Daniele (2018) investigate the relationship between
environmental commitment and corporate risk on a sample of 142 banks from 35 countries
during the period from 2011 to 2015 proving that banks that are closer to environmental issues
are also the least risky ones. It is clear that if, as the literature suggests, environmentally
friendly companies are exposed to fewer risks and are therefore less likely to fall into economic
and financial difficulties, then banks that finance such companies also face fewer risks.

Also interesting is a recent work by Murè, Spallone, Mango, Marzioni Bittucci (2020) that
investigate the impact of ESG activities on the probability for an Italian bank to incur into a
sanction. Their analysis is based on a sample of 13 Italian banks for the period 2008 -2018
taking ESG scores provided by Thomson Reuters and Bloomberg. The authors find a positive
relationship between ESG score and the probability of sanctions which through a careful
analysis of causal directions interpret it as follows: since receiving financial penalties damage s
the reputation of banks, they are driven to adopt ESG practices in order to improve their
reputation.

Even more investigated is the link between environmental, social and corporate governance
(ESG) criteria and corporate financial performance (CFP), began as early as the 1970s.
Thousands of empirical studies have been conducted on this subject with mixed results,
depending on the type of financial performance measured, the methodology and data used .
There is therefore no universal view on the direction of this relationship, i.e. whether there is
a positive, negative or no relationship, although currently the most widely accepted view on
the relationship between ESG performance and financial performance seems to be that of a
positive effect, if we look mainly at the results of meta-analyses carried out over the years.

Roman et al. (1999) were the first to draw conclusions by reorganizing most of the studies
published at the time and noted that most of them (33 studies) showed a positive relationship,
14 studies found no relationship, and only five studies found a negative result. Van Beurden
and Gossling (2008) make a successive relevant literature review (they include only studies
published after 1990) through a very detailed meta-analysis in which a strong link between
corporate social responsibility and corporate financial performance is confirmed. In fact, the
20
 authors obtain overwhelming results: about 68% of the included studies show a positive
relationship between CSP and CFP, 26% show no significant relationship, only 6% show a
negative relationship between. Friede, Busch and Bassen (2015) summarize the results of some
2,200 individual studies in their work providing an overview of the academic research on this
topic. The balance is that about 90% of the studies show a non-negative relationship between
engagement in ESG issues and corporate financial performance with the majority of studies
arriving at positive results 19. For example, Kempf and Osthoff (2007) find that buying stocks
with high socially responsible ratings and sell stocks with low socially responsible ratings
leads to high abnormal returns of up to 8.7% per year, especially using the best-in-class
screening selection approach. The authors implement this strategy of buying stocks with high
SRI ratings and selling stocks with low SRI ratings for securities included in the S&P 500 and
DS400 for the period 1992-2004. Statman and Glushkov (2009), analyzing 1992-2007 returns
of stocks rated on social responsibility, observe that this strategy gave socially responsible
investors an advantage over conventional investors. More recently, Verheyden, Eccles and
Feiner (2016) conduct a deep analysis and note that ESG screening increases risk-adjusted
returns. The authors define four different investment universes (‘Global All 10%’, Global All
25%, ‘Global Developed Markets 10%’ and ‘Global Developed Markets 25%%) and find that
with ESG screening there is a positive effect rather than any negative effect in fact for three
out of the four universes ESG screening improves risk-adjusted returns (ESG screening adds
about 0.16% in annual performance, on average). Esteban-Sanchez, de la Cuesta-Gonzalez
and Paredes-Gazquez (2017) analyze a sample consisted of firm-year observations from 2005-
2010 of 154 financial entities from 22 countries (55 from Europe, 49 from America, 40 fr om
Asia, 10 from Oceania). They observe that good corporate governance and good employee
policies have a positive effect on corporate financial performance 20 but the 2008 crisis has
reduced this positive effect 21. Sherwood and Pollard (2017) prove that integrating ESG market
shares into institutional portfolios succeeds in providing higher returns to investors . They use

19
Interestingly, such evidence emerges across approaches, regions and asset classes, except for portfolio
studies. The authors interpret this exception of portfolio return studies as the source of bias on the perception
of the ESG-CFP relationship.
20
It means that shareholders and employees may constitute the most relevant stakeholders in the banking
industry in the analyzed years.
21
They also find evidence that better responsible relations with the community led to higher levels of
corporate financial performance during the crisis.
21
ESG ratings developed by MSCI (from 2007 to 2017) for 6,400 companies around the world,
from 85 countries and 128 industries. Thus, by eliminating possible distortions by countries
and sectors, this increase in portfolio returns is interpreted as an independent risk premium
promulgated by ESG factors.

Some literature also points to a lower cost of capital for companies with higher ESG rankings
(see Dhaliwal, 2011 and El Ghoul et al., 2011), which clearly translates into a lower cost of
equity and thus an increase in the value of the company.

Almost all studies concern private companies, although some have focused on public
companies. De Lucia, Pazienza and Bartlett (2020) carry out a case study of 1,038 public
companies in Europe considering the fiscal year 2018-2019. The authors’ aim is to investigate
whether ESG business practices can lead to better financial performance of public firms. Their
findings show a positive relationship between the ESG variables and the financial
performances represented by ROE and ROA.

Recent examples of evidence to the contrary, i.e. of a non-existent or even negative

relationship between ESG performance and financial performance, are also numerous.
Halbritter and Dorfleitner (2015) who find no significant return differences between firms with
high or low ESG ratings; Ravelli and Viviani (2015) who note that there is no real cost or
benefit for including corporate social responsibility into investment decisions. According to
them the findings depend on the methodological choices made by the researchers. Auer and
Schuhmacher (2016) using a new international dataset of ESG scores from Sustainalytics, they
investigate whether the selection of socially responsible stocks can lead to ou tperformance in
various international equity markets. The authors observe that for Europe, the US and Asia,
the selection of high (low) ESG securities does not appear to consistently increase or decrease
investment performance relative to benchmarks and low (high) ESG securities.

Even if one wants to believe in a null or negative relationship, one has to explain why investors
increase their demand for investment according SRI principles. The answer seems to be that
investors place an intrinsic value on SRI investments and are therefore also willing to give up
some of the lower performance returns in order to realize them (Renneboog et al., 2008). Early
evidence which further supports this view comes from Hartzmark and Sussman (2019) who
observe how investors actively responded to a “shock to the salience of the sustainability” by

22
 directing money from funds with low portfolio sustainability ratings to those with high ratings,
but with no evidence that high sustainability funds outperform low sustainability funds.

While the link between ESG performance and corporate financial performance in general is
still debated, what is emerging in the literature is the view that highly sustainable companies
with higher sustainability rankings (or scores) tend to be less risky and more resilient during
turbulent periods. The idea is that corporate sustainability investment offers as an insurance
protection against adverse events, and in particular protection against downside risk.
Regarding the 2008-2009 global financial crisis, several works and evidence go in this
direction. Cornett et al. (2016) observe that US banks’ financial performance during the Great
Recession of 2008-2009 is positively related to their ESG score; Lins, Searveas, and Tamayo
(2017) show that US non-financial firms with high ES ratings had better financial performance
than other firms during the crisis.

Bannier, Bofinger and Rock (2018) investigate the effectiveness of ESG investments in the
US and Europe using data between 2003 and 2017 and observe that firms with higher ESG
scores behave somewhat like insurance companies by tending to provide a negative return, but
their risk measures decline as their ESG scores increase, especially in stress periods.
Chiaramonte et al. (2021) use a sample of European banks operating in 21 countries over 2005-
2017 showing that the total ESG score, as well as its sub-pillars, reduces bank fragility during
periods of financial distress.

Following this theory of the insurance role of stocks of firms with high sustainability scores
some add that the investor pays for the insurance provided by high ESG stocks during the
market shock with weaker subsequent performance. In essence, this would mean that an
investor could buy stocks with a high social score as a partial hedge, as the stocks would be
more resilient during market crashes, but the investor would have to pay for this hedge with
the subsequent underperformance of the stocks 22.

Here the COVID-19 pandemic seems to give us a great opportunity to confirm the insurance-
like behavior and resilience of securities with high ESG performance in times of crisis.

22
Nofsinger and Varma (2014), and Jurvanen (2020) provide empirical evidence in their studies on
underperformance after the market downturn during the recovery period.

23
 2.2 ESG and COVID-19 pandemic

After having been confronted with the terrible financial crisis of 2008-2009, we are now facing
an emergency situation that is probably worse: the COVID-19 pandemic. Huge and increasing
day by day are the human losses since the outbreak in February 2020: at the second half of
November 2021 the number of deaths globally exceeded the 5,000,000 of people, whereas
more than 250,000,000 are confirmed cases 23. Clearly the economic costs are also very high.
The Word Bank (2020) estimated a contraction of the global economy of 5.2% for the year
2020, representing the most severe global recession since World War II. Almost all countries,
according to analyses by the International Monetary Fund (IMF), experienced either a
contraction in GDP or a significant slowdown in growth. Globally, GDP fell by around 4.2%
compared to 2019. The 2020 numbers are an IMF estimate, but while they are provisional data,
they are still reliable forecasts that usually differ little from the final figures. The European
Union as a whole, with all 27 Member States, lost about 6.1% of GDP in 2020. Considering
only the 19 Eurozone countries, however, the decline was 6.6%, driven mainly by the results
of Spain, Italy, Greece and France, with -10.96%, -8.87%, -8.25% and -8.23% respectively 24.

The spread of the COVID-19 pandemic led world government to take drastic containment
measures such as the various lockdowns seen more or less everywhere. These conditions
spilled over to the stock market, which suffered a sudden and unprecedented crash in the early
months of 2020 in response to a completely unexpected exogenous shock. In these choppy
waters, share price movements have been frenetic. It is important to understand which
corporate characteristics have been relevant in this turbulent environment. The first study to
analyze the connection between various company characteristics and share price reactions to

23
According to OMS data, as of the 19 November 2021 there are about 255,324,963 confirmed cases and
5,127,696 deaths from the beginning of the COVID-19 Pandemic.
24
https://www.startingfinance.com/news/pil-risultati-2020/
24
the COVID-19 pandemic comes from Ding et al. (2020) who use data on over 6,000 companies
in 56 economies during the first quarter of 2020. Among the corporate characteristics of
relevance and importance especially in recent years is undoubtedly the degree of corporate
social responsibility of the company. This commitment is summarized in an environmental,
social and governance (ESG) score. The situation created by the pandemic has certainly
created a unique opportunity to test the behavior of the various firms that profess, to a greater
or lesser extent, their responsibility towards society. Since companies did not have much time
to respond to the COVID-19 crisis it is thus possible to study the causality from firm
characteristics to stock returns. The COVID- 19 crisis was an unexpected exogenous shock
that also resulted into a stock market crash. Therefore, the stock market crash that followed
the realized and expected effects of the pandemic makes it possible to study the relationship
between ESG policies and stock returns during a market crash period, and the exogenous
nature of the shock also warrants the study of causality from ESG policies to returns.

In recent months several studies have addressed the causal link between ESG scores and
company’s performance during the COVID-19 pandemic. On this road, Albuquerque et al.
(2020) show that U.S. stocks with higher ES ratings have significantly higher returns, lower
return volatility, and higher operating profit margins during the first quarter of 2020. The
authors also investigate how ES policies build resilience by focusing on theories of customer
and investor loyalty and conclude that consumer and investor loyalty play an important role in
making high ES firms more resilient during times of stress.

Broadstock et al. (2021) examine the role of ESG performance during the financial crisis
triggered by the global COVID-19 pandemic in the Chinese market. They observe that overall
ESG scores are positively associated with short-term cumulative returns and when they go to
decompose the sub-score for environmental (E), social (S) and governance (G), they note that
cumulative equity returns are positively correlated with E and G, but not with S. They also
perform a robustness test of the results by redoing the same type of analysis in "normal" times
from which they note a smaller effect of ESG performance on financial performance in quiet
periods. ESG performance is therefore used by investors more as a risk hedging strategy and
with a view to the future, at least for those investing in the Chinese market.

Not all works obtain results about a positive association between ESG scores (or only ES) and
performance during the COVID-19 pandemic. Takahashi and Yamada (2021) obtain contrary

25
 evidence for the Japanese market in fact they do not observe any relationship between ESG
scores and stocks’ abnormal returns.

Albuquerque, Kroskinen, Santioni (2021) explore the issue by studying the trading behavior
of U.S. actively managed equity mutual funds during the COVID-19 market crash to
understand how they have driven the resiliency of ES stocks. Surprisingly, from their analysis
they find no significant difference in net sales of ES versus non-ES stocks for ESG and non-
ESG funds. Since the difference is not in the outflows, the authors argue that the resilience
mechanism of ES stocks must have been driven mostly by the inflows recorded by ESG funds,
as already noted by Pastor and Vorsatz (2020). They also uncover another mechanism that
contributed to the observed resilience of ES stocks, this time attributable to non -ESG funds.
Indeed, during the crash, net fund sales increased for non-ES securities across all fund types
while the same did not occur for ES securities. Their findings reinforce the argument
(introduced in the previous section) that SRI funds investors are willing to accept lower returns
than investors in conventional mutual funds. Also, the authors investigate the behavior of Low
Carbon Designated funds 25, obtaining similar results to Ceccarelli, Ramelli and Wagner
(2021) which have shown that low carbon funds have experienced strong inflows during the
COVID-19 outbreak.

An evidence contrary to that of Albuquerque, Kroskinen, Santioni (2021) comes from

Glossner, Matos, Ramelli, and Wagner (2021), who focus on the behavior of institutional
investors during the pandemic outbreak. According to their results, institutional investors
reacted to the market crash by investing more in shares of companies with lower de bts and
higher cash holdings, but not in those with higher ES scores.

Another recent interesting work comes from Garel and Petit-Romec (2021), who investigate
whether firms (large U.S. listed companies) that were getting ready for climate change through
the adoption of responsible initiatives on environmental issues experience better stock returns
during the COVID-19 crisis. The commitment of these companies to climate change seems to
have been rewarded since they have performed better in terms of stock returns. The reading
key provided by the authors is that pandemic outbreaks and natural disasters resulting from

25
Morningstar classification: https://s21.q4cdn.com/198919461/files/doc_news/2018/OS_Low_Carbon.pdf

26
 climate change have in common the fact that they are very rare, so if a pandemic is possible,
why should we not be concerned about climate change? 26

Summing up the works in the literature, most of them seem to point in the same direction, i.e.,
that of a significant and positive connection between a company’s commitment to ESG issues
and its performance, or rather its resilience, during the market crash due to the COVID -19
pandemic outbreak.

2.3 ESG Investing: US vs Europe

At the same time, most of the above-mentioned works have as their reference sample the US
market and in particular US stocks, whereas at the time I am writing a study concerning the
European market has not yet been conducted. This is precisely the contribution I want to make
to the literature, so the questions I am trying to answer are as follows. Was there also in Europe
during the first phase of the Covid-19 pandemic a better performance of companies with high
ESG scores (ES in particular) than companies with lower scores? If so, in what proportion
compared to the US case?

Before testing empirically whether this resilience effect was also present in Europe and to what
extent compared to that we have seen in the United States, let us try to make some assumptions
about what we are going to observe.

In their conclusion Albuquerque, Kroskinen, Santioni (2021) affirmed that an interesting

contribution would be to conduct an analysis of the performance of actively managed
European ESG and non-ESG funds pointing out that ESG investment in Europe is even more
widespread than in the United States. The fact that ESG investing is more prevalent in Europe

26
A poll conducted by J.P. Morgan Research among investors from 50 global institutions, representing
a total of $ 12.9 trillion in assets under management, further indicates that the large majority of
investors expect environmental and climate responsibility to become even more important following the
COVID-19 crisis (J.P. Morgan 2020).

27
Figure 4
The market of ESG investing at the start of 2018

42% growth 11% growth

in 2 years in 2 years

$ 12.0 tn

38% growth
in 2 years

46% growth
in 2 years

Source: Global Sustainable Investment Alliance (2019)

than in other macro-areas of the world is a given, as we can observe in Figure 3. According to
data provided in the 2018 Global Sustainable Investment Review, the amount of assets
invested according to ESG criteria has reached $30.7 trillion globally. Europe is the region
with the highest percentage of assets invested according to responsibility criteria (48.8%),
while the United States has a much lower, albeit increasing, percentage (25.7%). Thanks to its
rapidly development, It is now certain that ESG investing is the most dynamic sector of the
asset management.

From an asset management perspective, in their first work Bennani et al. (2018) investigated
the impact of ESG investing on asset pricing in the stock market and showed that this approach

28
 to investing, from 2010 to 2013, was not a source of outperformance but rather led to negative
returns for passive and active investors. This scenario was reversed from 2014 to 20 17 where
ESG investing appears to have delivered outperformance in both Europe and the US . In Drei
et al. (2020) this analysis is extended to the eighteen months from January 2018 to June 2019
with interestingly results. The authors go so far as to define as “transatlantic divide” referring
to the great divergence between America and Europe in ESG equity trends.

Figure 5
Annualized return of Q1 − Q5 long-short portfolios (North America)

4
Return (in %)

-2

ESG Environmental Social Governance

Source: Drei at al (2019) ESG Investing in Recent Years: New Insights from Old Challenges

Over the period they studied (last eighteen months from January 2018 to June 2019) they
observe a contradictory trend in ESG investments between North America (Figure 5) and the

29
 Figure 6
Annualized return of Q1 − Q5 long-short portfolios (Eurozone)

6
Return (in %)

-2

ESG Environmental Social Governance

Source: Drei at al (2019) ESG Investing in Recent Years: New Insights from Old Challenges

Eurozone (Figure 6). In fact, after several years (from 2010 to 2018) in which a parallel trend was
observed between Europe and the United States, for the two years from 2018 to 2019, the authors
note that the returns of North American long-short portfolios have decreased compared to those
observed in previous years for all three pillars (they are even negative for the environmental pillar),
while in Europe this trend reversal is not evident, on the contrary, returns on long-short portfolios
are broadly stable, showing an increase for the environmental and social pillars and a decrease for
the governance pillar. Thus, we see the end of the convergence of these two investment universes,
which the authors refer to as the transatlantic divide. In addition to observing this phenomenon, the
authors also attempt to explain it. In particular, linking to their previous work (Bennani et

30
al.,2018b), the authors hypothesize that two main effects contributed to ESG performance from
2014 to 2017: the selection effect of ESG screening and the demand effect of ESG screening, which
is the one we are most interested in. By the demand effect of ESG screening, the authors simply
refer to the balance between supply and demand. Clearly the ESG investment flows that have been
observed in recent years may have largely contributed to the good performance of ESG investments
in the 2014-2017 period in both the US and European markets while for the more recent period
they assume that the serious interest of European investors in ESG issues continues to influence
supply and demand with a consequent effect on European share prices in 2018 and 2019 but the
same is no longer the case with US investors.

However, if we look at the results in the literature regarding the relationship between ESG
performance and financial performance, the evidence is different. Indeed, in their meta-
analysis, Friede et al. (2015) show that studies done with US data have a higher percentage of
positive results than studies done with European data. This should mean that the impact of
ESG performance on CFP is greater in the US market than the European market. What interests
us most, however, is not the simple CSP-CFP link, but rather their link in times of greatest
stress. As discussed at the end of section 2.2, there is now a widespread notion that corporate
sustainability offers insurance-like protection against adverse events, and in particular
protection against downside risk. Recent work exploring this issue comes from Bannier,
Bofinger and Rock (2018) who investigate the effectiveness of ESG investments in the US
and Europe using data between 2003 and 2017. The authors conduct analyses at the portfolio
and firm level and observe that firms with higher ESG scores behave somewhat like insurance
companies by tending to provide a negative return, but their risk measures decline as their ESG
scores increase. In contrast, companies with low ESG scores offer a highly significant excess
return as a form of risk premium. This phenomenon is observed for both the US and European
samples, but with much larger effects for the former. In addition to this, the authors also
investigate whether in more turbulent market phases there is an increase in this "insurance"
effect of companies with high ESG scores and note that this is true for the US case while it is
not the case in Europe.

The COVID-19 pandemic and subsequent collapse of financial markets around the world
therefore opens the door to further study of the insurance role of sustainable investments and
comparisons between regions. It is obvious that in order to make a credible comparison, the
study must be conducted on a negative event common to the two geographical areas, in the
31
 same observation period and with the same methodology. So, the contribution we would like
to make is along these lines, i.e. to provide an analysis of the possible resilience of European
ESG stocks with respect to stocks with lower ESG score during the outbreak of pandemic and
to make a comparison with the US case. From the evidence offered by the literature so far, and
in particular by Bannier, Bofinger and Rock (2018), we expect to observe this form of
resilience in Europe as well, albeit in a reduced form compared to US companies. So let's
check what has happened, at least for the first quarter of 2020, coinciding with the outbreak of
the pandemic COVID-19.

3. Data and Methodology

3.1 Data source

We choose to use the Thomas Reuters Refinitiv ESG database which is one of the most important
and reliable providers of ESG data and one of the most used in finance research studies 27. Other
are KLD by MSCI, Vigeo-Eris by Moody’s, RobecoSAM by S&P Global and Sustainalytics.

Thomas Reuters ESG summary and pillar scores are weighted average of ESG category scores.
Also, under its scoring methodology, the category weightings are consistent across all industries
and sectors 28.

As shown in Table 1, Refinitiv ESG evaluates firms’ environmental (E) performance in three
categories: resource use, emissions, and innovation. Social (S) commitments are measured in
four areas: workplace, human rights, community, and product responsi- bility. Governance
(G) is evaluated in three dimensions: management, shareholders, and corporate social
responsibility strategy. Each subcategory contains several ESG themes. For example, the

27
The Thomas Reuters Refinitiv scores have been employed in several studies so far such as Ioannou and Serafeim
(2012); Hawn and Ioannou (2016); Monti et al. (2018); Bannier et al. (2019); Albuquerque, Koskinen, Yang and
Zhang (2020).
28
https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-esg-scores-
methodology.pdf

32
resource use cate- gory contains four themes: water, energy, sustainable packaging, and
environmental supply chain. The emission category covers themes of CO2 emissions,
waste, biodiversity, and environmental management systems. The ESG subcategory on
workforce includes four themes: diversity and inclusion; career development and training;
working conditions; and health and safety. Within these themes are total of over 450 ESG
metrics which are aggregated to 186 ESG measures that are used to calculate the ten category
scores. The scores are based on the relative performance and materiality of ESG factors within

Table 1
Refinitiv weights for ESG Pillars and sub-categories
This table reports the weights attributed by Refinitiv for every main pillar and sub-categories
evaluating the ESG score for a company.

ESG Pillars ESG Categories Weight

Resource Use 11,0%

Environment
Emissions 12,0%

Env. Innovation 11,0%

Workforce 16,0%

Human Rights 4,5%

Social
Community 8,0%

Product Responsibility 7,0%

Management 19,0%
Governance
Shareholders 7,0%

CSR Strategy 4,5%

Total Total 100,0%

33
 the firm’s sector (for E and S) and country (for G) and range from 0 to 100. Thomas Reuter’
data sources generally include various new sources such as stock exchange literature, annual
financial and sustainability reports, and websites of non-governmental organizations. All data
used by analysts must be objective and public. After collecting annual data, analysts transform
this qualitative data into quantitative data to arrive at an ESG score for the company.

3.2 Sample description

In our analysis we follow, as faithfully as possible, the methodology used by Albuquerque,

Koskinen, Yang and Zhang (2020). So, we can obtain results comparable to the US case they
studied.

First of all, we download from Thomas Reuters database the ESG scores for 2019 or alternatively
2018 for all European companies, i.e. belonging to one of the 27 countries of the European Union
(I therefore exclude from the sample countries such as the UK, Switzerland and Norway which are
not part of the EU). This gives us the ESG score for 1,053 companies out of a total of 5,859 listed
European companies 29. This result is not surprising as more or less the same proportion of listed
companies to those whose ESG scores is available is found in the US case 30.

We focus primarily on environmental and social (ES) aspects of ESG to avoid capturing a
Governance effect and then check the robustness of the results also by including the Governance
pillar. It is a common practice to aggregate environmental(E) and social(S) score into a single score
as they are highly correlated. So, we obtain the ES score as the weighted average of the
Environmental and Social score, by omitting the governance score.

We also obtain daily stock returns from Refinitiv database for the first quarter of 2020 and
from the starting of 2018 to the end of 2019. Not for all companies the historical series is
complete, so we have to make a further cut in my sample which is reduced to 1,002

29
According to the Osiris database (Buereau van Dijk editor) , as of October 2021, there were 5,859 listed
companies in Europe (27 countries) and 3,361 in the eurozone.
30
Albuquerque, Koskinen, Yang and Zhang (2020) find the ESG score of 2,171 US companies out of
approximately 11,000 listed companies

34
 companies 31, with 62,126 firm-day return observations. In Figure 7 we observe the distribution
of these companies across the representative countries of the 27 EU countries. Around 58% of
the companies in the 27 European countries are represented by just four countries: Germany
(169), Sweden (182), France (138) and Italy (94).

Figure 7
Companies’ distribution across most representative countries

Other Austria
Belgium
9% 3%
4% Denmark
5%

Finland
5%

Sweden
18%

France
14%

Spain
6%

Poland
4%
Germany
Netherlands 17%
6%
Italy
9%

This figure represents the distribution of 1,002 companies in our sample across the EU 27 countries. Not
all 27 countries have listed companies with ESG score available, so they are excluded from my sample. In
Other companies from the least represented countries are grouped together: Czech Republic (3), Cyprus
(10), Greece (25), Hungary (3), Ireland (13), Luxembourg (23), Slovenia (1).

31
See Table A in Appendix for the complete sample
35
 In Figure 8 we instead observe their distribution according to the various 22 sectors, also
obtained from the Refinitiv database. We note that almost one third of the sample firms belong
to one of these three sectors: Banking & Investment Services, Industrial & Commercial
Service, Industrial Goods.

Figure 8
Companies’ distribution across sectors

104
96 100

61 58
55 54
50
37 37 35 39 40 44 44
34
23 22 26 26
6 11

In this figure are shown the various sectors (22) according to Refinitiv’s breakdown and their frequency in
our sample of 1,002 companies.

36
 The daily abnormal return is estimated as the difference between the daily logarithm return of
a stock and the CAPM beta times the daily logarithm return of the market. We estimated the
CAPM beta using daily returns from 2018 and 2019, and the STOXX Europe 600 as the market
index. STOXX 600 is an equity index consisting of 600 of the major European market
capitalizations. This index has a fixed number of 600 constituents, including large capitalized
companies in 17 European countries, covering approximately 90% of the market capitalization
of the European stock market. Although it includes companies from countries outside the
EU27 (Norway, UK and Switzerland), we consider it to be the best possible proxy for
European market returns. In Figure 9 we observe the STOXX 600 performance during the first
quarter of 2020 with the prominent collapse at the end of February 2020 of around -35% in
one month.

Figure 9
STOXX Europe 600 index level from 01.02.2020 to 03.31.2020

450

430

410

390

370

350

330

310

290

270

250

This figure shows the historical index level of the STOXX Europe 600 index for the first quarter of
2020. At the beginning of January 2020 the index level was 419.72 (02.01.2020) with the peak reached
on 19.02.2020 at 433.90. From the 20.02.2020 the rapid decline caused by the outbreak of the COVID-
19 pandemic begins with the lowest index level of 279.66 reached on 18.03.2020.

37
Therefore, we obtain 63,126 daily abnormal returns relative to the performance of 1,002
European Union firms during the first four months of 2020.

Table 2 below shows the main statistics of the variables of interest used in our analysis: ES
score, CAPM Beta, Quarterly abnormal return and daily abnormal return.

Table 2
Summary statistics

Variable Obs. Mean SD 25% Median 75%

ES score 1,002 55.48 23.50 38.71 58.82 74.94

CAPM Beta 1,002 0.91 0.41 0.63 0.87 1.16

Quarterly return 1,002 -32.81 41.54 -51.38 -32.04 -12.33

Quarterly abnormal 1,002 -8.31 41.85 -25.94 -7.58 10.22

return

Daily abnormal return 63,126 -0.20 6.46 -1.40 -0.13 1.05

This table reports the summary statistics (number of observations, mean, standard deviation [SD],
25th, 50th [median], 75th percentiles) for variables of interest. ES score and CAPM Beta’ statistics are
represented in absolute value whereas Quarterly return, quarterly abnormal return, daily abnormal
return’ statistics are represented in percentage.

38
 3.3 Empirical analysis

This section explains the various econometric models used in the study. Cross-sectional
regressions, time-series cross-sectional regressions and difference-in-differences regressions
with various specifications are implemented. We use the software R to implement these sets
of regressions.

3.3.1 Cross-sectional regressions

In the first test we simply use cross-sectional regressions of firms’ quarterly stock market
performance where the dependent variable is the quarterly abnormal return (from 01.02.2020
to 03.31.2020) of the i company and as independent variable we take the ES_score, i.e. the
weighted environmental and social score of firm i. We also include controls of fixed effects
for country and sector. The implemented cross-sectional regression is the following:

𝑄𝑢𝑎𝑟𝑡𝑒𝑟𝑙𝑦 𝑎𝑏𝑛𝑜𝑟𝑚𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛𝑖 = 𝛽0 + 𝛽1 𝐸𝑆_𝑠𝑐𝑜𝑟𝑒𝑖 + 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝐹𝐸𝑖 +

𝑆𝑒𝑐𝑡𝑜𝑟 𝐹𝐸𝑖 + 𝜀𝑖 (1.1)

In the second implementation we choose not to take the ES score as an explanatory variable
but rather a dummy variable that takes value 1 or 0 depending on whether the ES score of firm
i falls within the quartile of interest. For the first quartile we are going to assign to the dummy
ES value 1 to the 251 with the highest ES score (25% of the total of 1002 firms) and 0 for the
remaining 751 while for the second quartile, i.e. the median, we are going to assign to the
dummy ES value 1 to the first 501 with the highest ES score and 0 to the remaining 501.

39
 𝑄𝑢𝑎𝑟𝑡𝑒𝑟𝑙𝑦 𝑎𝑏𝑛𝑜𝑟𝑚𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛𝑖 = 𝛽0 + 𝛽1 𝐸𝑆_𝑇𝑜𝑝𝑅𝑎𝑛𝑘𝑒𝑑𝑖 +
𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝐹𝐸𝑖 + 𝑆𝑒𝑐𝑡𝑜𝑟 𝐹𝐸𝑖 + 𝜀𝑖 (1.2)

3.3.2 Time-series cross-sectional regressions

We then choose to implement time-series cross-sectional (TSCS) regressions by no longer

taking the quarterly abnormal return as the dependent variable, but rather all 63 daily abnormal
returns of the 1,002 firms in our sample. As before we initially choose the ES score of firm i
as the explanatory variable plus fixed effects:

𝐷𝑎𝑖𝑙𝑦 𝑎𝑏𝑛𝑜𝑟𝑚𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛𝑖𝑡 = 𝛽0 + 𝛽1 𝐸𝑆_𝑠𝑐𝑜𝑟𝑒𝑖 + 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝐹𝐸𝑖 +

𝑆𝑒𝑐𝑡𝑜𝑟 𝐹𝐸𝑖 + 𝜀𝑖 (2.1)

As before we repeat the same analysis choosing not to take the ES score as an explanatory
variable but rather a dummy variable that takes value 1 or 0 depending on whether the ES
score of firm i falls within the quartile of interest:

𝐷𝑎𝑖𝑙𝑦 𝑎𝑏𝑛𝑜𝑟𝑚𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛𝑖𝑡 = 𝛽0 + 𝛽1 𝐸𝑆_𝑇𝑜𝑝𝑅𝑎𝑛𝑘𝑒𝑑 𝑖 + 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝐹𝐸𝑖 +

𝑆𝑒𝑐𝑡𝑜𝑟 𝐹𝐸𝑖 + 𝜀𝑖 (2.2)

The cross-sectional regressions and the TSCS regressions implemented in this way, i.e. using
firstly the share return as the dependent variable and the ES score as the independent variable
and then a dummy variable for the best companies in terms of ES score, clearly investigates
the relationship between financial performance and ESG performance, i.e. the classic CSP -

40
 CFP relationship. The fact of taking the first quarter of 2020 as the observation period,
coinciding with the outbreak of the CIVID-19 pandemic and the consequent collapse of
financial markets worldwide, allows us to attribute significance to this implementation and its
results with regard to the object of the study, namely the possible resilience of the shares of
companies with high sustainability scores compared to others.

So, the cross-sectional analysis provides an initial and partial indication of the possible
resilience effect of the top ES companies as it does not differentiate between shown pre- and
post-COVID 19 pandemic outbreak.

3.3.3 Difference-in-differences regressions

In order to study the issue in more depth, we implement another test based on difference-in-
differences regressions that represents the main test of my analysis. Difference-in-differences
(DID) is a quasi-experimental statistical technique commonly used in economic research. Vast
are the works in which it is implemented. The first it is attributable to Snow (1855), an analysis
of a London cholera outbreak. Other examples are Card (1990) (1992) study the effect of
immigration on native wages and employment; Meyer, Viscusi and Durbin (1995) investigate
the effects of temporary disability benefits on time out of work after an injury; Garvey and
Hanka (1999) focus on the effect of anti-takeover laws on firms’ leverage.

The simple idea behind this model is a comparison of pre-treatment and post-treatment
outcomes for individuals exposed to the treatment (treatment group) with respect to the
individuals not exposed to the treatment (control group). Therefore, DID estimator contains
two time periods “pre” and “post”, and two groups, “treatment” and “control” in order to
estimate the change in outcomes before and after a treatment (difference one) in a treatment
versus control group (difference two) 32. DID can be interpreted as a combination of time-series
difference (compares outcomes across pre-treatment and post-treatment periods) and cross-
sectional difference (compares outcomes between treatment and control groups). I t should be
noted that the DID estimator is based on a strong identifying assumption: the parallel trend

32
Goodman-Bacon (2021) “Difference-in-differences with variation in treatment timing” Journal of
Econometrics 225 (2021), 254-277
41
 assumption. It requires that, in the absence of the treatment, the average outcomes for the
treated and control groups would have followed parallel paths over time 33. In other words,
both the treatment and control groups should experience the same change in outcome in
absence of treatment. This assumption is violated when there exist unobserved factors that are
correlated with both treatment status and timing of the treatment. In fact there could be factors,
besides the treatment, that cause a change in one group but not the other at the same time as
the treatment.

In our case study the treatment group is identified with the group of companies with the highest
ES score (first quartile) whereas the control group is identified with the remain ing 75% of the
companies, which are those with lower ES scores. At the same time, the watershed between
pre and post time periods is the date of 24 February, which is universally accepted as the date
of the outbreak of the COVID-19 pandemic.

So, we run the following daily regressions:

𝐷𝑎𝑖𝑙𝑦 𝑎𝑏𝑛𝑜𝑟𝑚𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛𝑖𝑡 = 𝛽0 + 𝛽1 𝐸𝑆_𝑇𝑜𝑝𝑅𝑎𝑛𝑘𝑒𝑑𝑖 + 𝛽2 𝑃𝑜𝑠𝑡_𝐶𝑂𝑉𝐼𝐷𝑡 +

𝛽3 𝐸𝑆_𝑇𝑜𝑝𝑅𝑎𝑛𝑘𝑒𝑑𝑖 ∗ 𝑃𝑜𝑠𝑡_𝐶𝑜𝑣𝑖𝑑𝑡 + 𝐹𝑖𝑟𝑚 𝐹𝐸𝑖 +
𝐷𝑎𝑦 𝐹𝐸𝑡 + 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝐹𝐸𝑖𝑡 + 𝑆𝑒𝑐𝑡𝑜𝑟 𝐹𝐸𝑖𝑡 + 𝜀𝑖𝑡 (3)

The dependent variable we study is daily abnormal return of firm i on day t during the first quarter
of 2020. ES_TopRanked is a dummy variable that equals one for firm i if its ES score is ranked in
the top quartile of my sample, and zero otherwise. Post_COVID is another dummy variable that
equals one from February 24 (day chosen as the watershed between pre- and post-pandemic period)
to March 31, 2020, and zero before this period. February 24 is the date used to identify the
pandemic in our difference-in-differences regressions, coinciding with the first trading day after
the lockdown in Europe. As before we control for countries and sectors fixed but in this case on
a daily basis and no longer for the three-months period. So, in Equation 2 the coefficient on the
interaction term (ß3) captures the causal effect of ES policies on stock performance during the

33
Abadie A. (2005) “Semiparametric Difference-in-Differences Estimators” Review of Economic Studies
(2005) 72, 1-19
42
 crisis. The significance of this difference-in-difference regressions test is much more relevant
in fact we use the COVID-19 pandemic shock to detect causality by studying the effect of precrisis
ES on financial performance during the crisis so we can attribute the stock market reaction to the
predetermined ES policies.

4. Results
Here we report the main results of the thesis. In 4.1 are reported the results of the cross-sectional
analysis whereas in 4.2 of the difference-in-differences analysis, both described in the previous
section.

4.1 Results of cross-sectional regressions

In Table 3 are represented results of regressing quarterly CAPM-adjusted log returns on companies’
ES scores. In column (1) are reported the results obtained by following Equation 1.1. The
coefficient of the ES score (+0.123%) shows a weak influence of the ES score on the performance
of European companies during the first quarter of 202034. Furthermore, looking at the results of the
implementation of equation 1.2 we do not obtain significant results by taking the dummies for the
first quartile and the median as explanatory variables instead of the ES score.

Thus, there does not seem to be a strong link between ES performance and quarterly equity returns,
examples of which in the Italian case are varied. In the banking sector, Intesa Sanpaolo SpA (85.51
ES score) posted a raw return of -45.61% and an abnormal return of -14.96%, while Banca Generali
SpA (44.10 ES score) posted a raw return of -42.51% and an abnormal return of -12. 54%. 54%;
in Utilities Hera SpA (90.93 ES score) has a raw return of -17.68% and an abnormal return of -
1.33% while Edison SpA (57.16 ES score) has a raw return of -9.57% and an abnormal return of -
2.95%. These are examples of cases in which a clear difference in terms of ES score did not

34
The complete output obtained in R is reported in Table C of the Appendix.
43
coincide with a clear difference in stocks’ return, despite taking companies who operate in the same
country and sector.

We also note that there are no significant country fixed effects whereas we cannot say the same
about sectors. The worst performing sectors is Cyclical Consumer Services which makes
approximately -31% (significant at 10%), on the contrary Industrial Goods is the best with its +24%
(significant at 10%).

Table 3
Cross-sectional regressions for quarterly abnormal returns

(1) (2) (3)

Dependent variable Quarterly Quarterly Quarterly
abnormal return abnormal return abnormal return

ES_Score 0.123* / /
(2.184)

ES_TopRanked_FirstQuartile / 1.984 /
(0.648)

ES_TopRanked_Median / / 1.9426
(0.715)

Country FE Yes Yes Yes

Sector FE Yes Yes Yes

N 1,002 1,002 1,002

R2 0.1914 0.1878 0.1878

This table reports the results of cross-sectional regressions of the first quarter 2020 abnormal returns on
companies’ ES score (see Equation 1.1) and on a dummy variable ES (see Equation 1.2) under three
different specifications: using the ES score as explanatory variable and adding country and sector fixed
effects (column 1); using a dummy variable with value 1 for first 251 companies (first quartile) in terms of
ES score and 0 for others 751 and adding country and sector FE (column 2); using a dummy variable with
value 1 for first 501 companies (median) in terms of ES score and 0 for others 501 and adding country and
sector FE (column 2). The regression constant is not reported for brevity because is not interesting. Errors
are heteroskedasticity robust. The numbers in parenthesis represents t-statistics. The complete regressions
output are reported in Table B of the Appendix.
*p < 0.1; **p < 0.05; *** p < 0.01.

44
 4.2 Results of time-series cross-sectional regressions

Table 4 shows the results of the cross-sectional regressions implemented following equations (2.1)
and (2.2). Regarding the specification implemented following Equation 2.1 we look at the first
column and note a coefficient associated with the ES score of about 0.003% significant at 10%, a
result in line with that obtained from the regressions of quarterly returns. Using instead the
dummies instead of the ES score (Equation 2.2) we obtain significant results unlike those observed
previously. The top 251 firms by ES score achieve a daily extra-abnormal return of around 0.18%
(significant at 5%) during the first three months of 2020 (see column 2), a result that decreases to
around 0.13% (significant only at 10%) when we look at the top 501 firms by ES score (see column
3). This means that the daily outperformance tends to decrease as more companies with lower ES
scores are included in the "TopRanked" group.

Table 4
Time-series cross-sectional (TSCS) regressions for daily abnormal returns

(1) (2) (3)

Dependent variable Daily abnormal Daily abnormal Daily abnormal
return return return

ES_Score 0.00303* / /
(2.527)

ES_ TopRanked _FirstQuartile / 0.18621** /

(2.97)

ES_ TopRanked _Median / / 0.1296*

(2.339)

Country FE Yes Yes Yes

45
 Sector FE Yes Yes Yes

N 63,126 63,126 63,126

R2 0.00107 0.0011 0.00105

This table reports the results of TSCS regressions of the first quarter 2020 daily abnormal returns on
companies’ ES score (see Equation 1) and on a dummy variable ES (see Equation 1.2) under three different
specifications: using the ES score as explanatory variable and adding country and sector fixed effects
(column 1); using a dummy variable with value 1 for first 251 companies (first quartile) in terms of ES
score and 0 for others 751 and adding country and sector FE (column 2); using a dummy variable with
value 1 for first 501 companies (median) in terms of ES score and 0 for others 501 and adding country and
sector FE (column 2). The regression constant is not reported for brevity because is not interesting. Errors
are heteroskedasticity robust. The numbers in parenthesis represents t-statistics. The complete regressions
output are reported in Table A of the Appendix.
*p < 0.1; **p < 0.05; *** p < 0.01.

4.3 Results of difference-in-differences regression

Next, we conduct a diffence-in-differences estimation that captures a tighter link between the
performance of firms with high ES ratings (represented by the dummy variable ES_TopRanked)
and the COVID-19 pandemic (represented by the dummy variable Post_COVID) by using daily
data. The interaction between these two dummy variables is represented by the ES_TopRanked_x_
Post_COVID variable. As we immediately note from Table 5(a), the coefficient associated with
ES_TopRanked_x_ Post_COVID variable is positive (+0.25%) but quite small and significant only
at 10% level. At this confidence level high European ES-Top rated companies show an average
abnormal daily return of about 0.25% with respect to the other companies. Clearly the coefficient
for daily firms performance since the pandemic broke out (Post_COVID) is negative (-0.41%) and
significant at any level of confidence. Finally, the performance coefficient of high ES companies
during the entire period is really small and not significant. I can expected this by looking at the
results obtained before in the cross-sectional analysis. The results is basically the same by adding
or not Country and Sector fixed effects, and by adding Firm and Day fixed effects, as we seen in
the various specifications.

At this point I can look the results obtained by Albuquerque, Koskinen, Yang and Zhang (2020)
with regard to US companies. The comparison is possible because the data source and methodology
used for the analysis is practically the same, so the "resilience coefficient" of the top ES companies
in US obtained by them can be compared with ours (ES_TopRanked*Post_COVID) shown in the
46
Table 6(a). The difference is clear, (+0.45%) daily abnormal returns for US high ES companies
with respect to other US companies from 24 February 2020 to 31 March 2020 against a modest
(+0.25%) for European high ES companies. So the coefficient in the US case is approximately 44%
greater than the European and also is significant at 1% of confidence against the 10% of the
European coefficient.

Table 5(b) shows the results of using the second quartile, the median, as a watershed when
assigning a value of 1 or 0 to the dummy ES_TopRanked. We note that with this specification the
resilience coefficient drops from about 0.25% to 0.19% and is no longer significant, and this
happens for every specification.

Table 5(a)
Difference-in-differences regressions for daily abnormal returns – First Quartile for
ES_TopRanked variable

(1) (2) (3)

Dependent variable Daily abnormal Daily abnormal Daily abnormal
return
return return

ES_TopRanked 0.05244 0.07879 /

(0.668) (0.972)

Post_COVID -0.41477*** -0.41478*** /

(-6.911) (-6.912)

ES_TopRanked*Post_COVID 0.25064* 0.25066* 0.25068*

(2.090) (2.091) (2.085)

Company FE No No Yes

Day FE No No Yes

Country FE No Yes Yes

Sector FE No Yes Yes

N 63,126 63,126 63,126

47
 R2 0.00091 0.00189 0.01251

This table reports the results of difference-in-differences regressions of daily abnormal returns during the first
quarter of 2020 (from 03.01.2020 to 31.03.2020). ES_TopRanked equals one for high ES firms (first quartile)
and zero otherwise. Post_COVID equals one from February 24 to March 31 2020 and zero before this period
(from 03.01.2020 to 23.02.2020). In specification (1) Company FE, Day FE, Country FE and Sector FE are
As
notwe immediately
included. note, the(2)
In specification coefficient associated
Country and witheffects
Sector fixed ES_TopRanked_x_
are included but Post_COVID
Company andvariable
Day fixedis
effects not.
positive In specification
(+0.25%) (3) Company
but quite small and Dayonly
and significant fixed effectslevel.
at 10% are include so ES_TopRanked
At this confidence level highand
Post_COVID are removed. The estimated coefficients for ES_TopRanked, Post_COVID and their interaction
European ES-Top
are expressed rated companies
in percentage. show an
The numbers average abnormal
in parentheses daily return
are t-statistics. of about 0.25%
The regression constantgreater
is not
reported for brevity.
than other companies from February 24 to March 31, for a cumulative effect of 4% (0.25% * 16).
*p < 0.1; **p < 0.05; *** p < 0.01.

Table 5(b)
Difference-in-differences regressions for daily abnormal returns – Second Quartile (median)
for ES_TopRanked variable

(1) (2) (3)

Dependent variable Daily abnormal Daily abnormal Daily abnormal
return
return return

ES_TopRanked 0.02264 0.04563 /

(0.311) (0.642)

Post_COVID -0.44487*** -0.44994*** /

(-6.011) (-6.124)

ES_TopRanked*Post_COVID 0.19188 0.1959 0.19612

(1.884) (1.885) (1.793)

Company FE No No Yes

Day FE No No Yes

Country FE No Yes Yes

Sector FE No Yes Yes

N 63,126 63,126 63,126

48
R2 0.00090 0.00183 0.01066

This table reports the results of difference-in-differences regressions of daily abnormal returns during the
first quarter of 2020 (from 03.01.2020 to 31.03.2020). ES_TopRanked equals one for high ES firms (median)
and zero otherwise. Post_COVID equals one from February 24 to March 31 2020 and zero before this period
(from 03.01.2020 to 23.02.2020). In specification (1) Company FE, Day FE, Country FE and Sector FE are
not included. In specification (2) Country and Sector fixed effects are included but Company and Day fixed
effects not. In specification (3) Company and Day fixed effects are include so ES_TopRanked and
Post_COVID are removed. The estimated coefficients for ES_TopRanked, Post_COVID and their interaction
are expressed in percentage. The numbers in parentheses are t-statistics. The regression constant is not
reported for brevity.
*p < 0.1; **p < 0.05; *** p < 0.01.

5. Robustness tests

In this section we report the results of several robustness tests for both cross-sectional and
difference-in-differences regressions. First of all, in 5.1 we carry out cross-sectional regressions
changing the observation period i.e. we take the first quarter of 2019 and 2021; in 5.2 we implement
cross-sectional regressions and difference-in-differences regressions using ESG scores as a
variable instead of just ES and therefore including the Governance pillar; finally in 5.3 we conduct
sub-analyses for Eurozone countries only and for the most important Eurozone countries (France,
Germany, Italy, Netherlands, Spain).

5.1 Crisis period vs ‘normal’ period

The most important robustness test for the cross-sectional analysis is certainly this where we
change the observation period. In our cross-sectional analysis we regressed the 2020 quarterly
abnormal return of every company on his ES score, then we regressed the daily abnormal return of
the first quarter of 2020 on company’s ES score. We also did the same analysis using dummies for
Top Ranked companies for ES scores and not the ES score itself. So we decide to repeat the same
analyses for the first three months of 2019 and 2020. Clearly, the first months of 2019 are not
marked by the pandemic and can be considered as a period of calm while in the first quarter of

49
2021 we are still in the midst of the COVID-19 pandemic but we have now become accustomed to
this emergency situation which can therefore no longer be considered as a shock to the economy.
Therefore both of these quarters are therefore to be considered as normal periods compared to the
crisis period of 2020. So we choose to run this regressions (see Equation 1 and 2 in section 3.3.1)
on the quarterly and on the daily abnormal returns of 2020 and 2021, one year before and one year
after. The results of cross-sectional regressions on quarterly abnormal returns are reported in Table
6(a) for 2020 and Table 6(b) for 2021 whereas in Table 7(a) and Table 7(b) are reported results of
TSCS regressions on daily abnormal returns. For both two analysis and both the first quarters of
2019 and 2021, the coefficients associated with the ES scores and ES TopRanked dummies
coefficients are not significant. So, we get no evidence of outperformance relative to companies
with lower scores for both the first quarter of 2019 and 2021. The same companies that experienced
a positive and significant association between quarterly abnormal returns and ES scores in the first
quarter of 2020 do not show the same behavior one year earlier and one year later.

Table 6(a)
Cross-sectional regressions for quarterly abnormal returns – first quarter of 2019

(1) (2) (3)

Dependent variable Quarterly Quarterly Quarterly
abnormal return abnormal return abnormal return

ES_Score -0.01018 / /
(0.67151)

ES_TopRanked_FirstQuartile / 1.86288 /
(1.439)

ES_ TopRanked _Median / / 0.8305

(0.722)

Country FE Yes Yes Yes

Sector FE Yes Yes Yes

N 1,002 1,002 1,002

50
 R2 0.07752 0.07933 0.07785

This table reports the results of cross-sectional regressions of the first quarter 2019 abnormal returns on
companies’ ES score (see Equation 1) and on a dummy variable ES (see Equation 1.2) under three different
specifications: using the ES score as explanatory variable and adding country and sector fixed effects
(column 1); using a dummy variable with value 1 for first 251 companies (first quartile) in terms of ES score
and 0 for others 751 and adding country and sector FE (column 2); using a dummy variable with value 1 for
first 501 companies (median) in terms of ES score and 0 for others 501 and adding country and sector FE
(column 2). The regression constant is not reported for brevity because is not interesting. Errors are
heteroskedasticity robust. The numbers in parenthesis represents t-statistics.
*p < 0.1; **p < 0.05; *** p < 0.01.

Table 6(b)
Cross-sectional regressions for quarterly abnormal returns – first quarter of 2021

(1) (2) (3)

Dependent variable Quarterly Quarterly Quarterly
abnormal return abnormal return abnormal return

ES_Score -0.04373 / /
(0.0686)

ES_ TopRanked _FirstQuartile / 0.45068 /

(0.347)

ES_ TopRanked _Median / / -0.34481

(-0.299)

Country FE Yes Yes Yes

Sector FE Yes Yes Yes

N 1,002 1,002 1,002

R2 0.09061 0.08758 0.08755

This table reports the results of cross-sectional regressions of the first quarter 2021 abnormal returns on
companies’ ES score (see Equation 1) and on a dummy variable ES (see Equation 1.2) under three different
specifications: using the ES score as explanatory variable and adding country and sector fixed effects
(column 1); using a dummy variable with value 1 for first 251 companies (first quartile) in terms of ES score
and 0 for others 751 and adding country and sector FE (column 2); using a dummy variable with value 1 for
first 501 companies (median) in terms of ES score and 0 for others 501 and adding country and sector FE
(column 2). The regression constant is not reported for brevity because is not interesting. Errors are
heteroskedasticity robust. The numbers in parenthesis represents t-statistics.
*p < 0.1; **p < 0.05; *** p < 0.01.
51
Table 7(a)
Time-series cross-sectional regressions for daily abnormal returns – first quarter of 2019

(1) (2) (3)

Dependent variable Daily abnormal Daily abnormal Daily abnormal
return return return

ES_Score -0.00035 / /
(-0.838)

ES_TopRanked_FirstQuartile / 0.0205 /
(0.915)

ES_TopRanked_Median / / 0.00568
(0.287)

Country FE Yes Yes Yes

Sector FE Yes Yes Yes

N 63,126 63,126 63,126

R2 0.0009 0.00098 0.00091

This table reports the results of TSCS regressions of the first quarter 2019 daily abnormal returns on
companies’ ES score (see Equation 1) and on a dummy variable ES (see Equation 1.2) under three different
specifications: using the ES score as explanatory variable and adding country and sector fixed effects
(column 1); using a dummy variable with value 1 for first 251 companies (first quartile) in terms of ES
score and 0 for others 751 and adding country and sector FE (column 2); using a dummy variable with value
1 for first 501 companies (median) in terms of ES score and 0 for others 501 and adding country and sector
FE (column 2). The regression constant is not reported for brevity because is not interesting. Errors are
heteroskedasticity robust. The numbers in parenthesis represents t-statistics.
*p < 0.1; **p < 0.05; *** p < 0.01.

Table 7(b)
Time-series cross-sectional regressions for daily abnormal returns – first quarter of 2021

(1) (2) (3)

Dependent variable

52
 Daily abnormal Daily abnormal Daily abnormal
return return return

ES_Score -0.00039 / /
(-0.862)

ES_ TopRanked _FirstQuartile / 0.00559 /

(0.232)

ES_ TopRanked _Median / / -0.01014

(-0.477)

Country FE Yes Yes Yes

Sector FE Yes Yes Yes

N 63,126 63,126 63,126

R2 0.0009 0.0012 0.0011

This table reports the results of TSCS regressions of the first quarter 2021 daily abnormal returns on
companies’ ES score (see Equation 1) and on a dummy variable ES (see Equation 1.2) under three different
specifications: using the ES score as explanatory variable and adding country and sector fixed effects
(column 1); using a dummy variable with value 1 for first 251 companies (first quartile) in terms of ES score
and 0 for others 751 and adding country and sector FE (column 2); using a dummy variable with value 1 for
first 501 companies (median) in terms of ES score and 0 for others 501 and adding country and sector FE
(column 2). The regression constant is not reported for brevity because is not interesting. Errors are
heteroskedasticity robust. The numbers in parenthesis represents t-statistics.
*p < 0.1; **p < 0.05; *** p < 0.01.

5.2 Including the Governance Pillar

We make an additional check on the robustness of the results by repeating the cross-sectional
regression and the difference-in-differences analysis using the ESG scores (including Governance
pillar) instead of just ES scores as independent variable. As mentioned before, given the high
correlation between environmental (E) and social (S) pillar it is used to aggregate them into a single
score while it may be more meaningful to make a separate analysis for the Governance (G) factor.

53
 As shown in Table 8 and Table 9 we obtain a very similar value for the cross-sectional
implementations35 .

Table 8
Cross-sectional regressions for quarterly abnormal returns on ESG score

(1) (2) (3)

Dependent variable Quarterly Quarterly Quarterly
abnormal return abnormal return abnormal return

ESG_Score 0.14157* / /
(2.245)

ESG_ TopRanked _FirstQuartile / 0.77493 /

(0.614)

ESG_ TopRanked _Median / / -1.02614

(-1.017)

Country FE Yes Yes Yes

Sector FE Yes Yes Yes

N 1,002 1,002 1,002

R2 0.1916 0.08782 0.08867

This table reports the results of cross-sectional regressions of the first quarter 2020 abnormal returns on
companies’ ESG score (see Equation 1.1) and on a dummy variable ESG (see Equation 1.2) under three
different specifications: using the ES score as explanatory variable and adding country and sector fixed
effects (column 1); using a dummy variable with value 1 for first 251 companies (first quartile) in terms
of ES score and 0 for others 751 and adding country and sector FE (column 2); using a dummy variable
with value 1 for first 501 companies (median) in terms of ES score and 0 for others 501 and adding
country and sector FE (column 2). The regression constant is not reported for brevity because is not
interesting. Errors are heteroskedasticity robust. The numbers in parenthesis represents t-statistics.
*p < 0.1; **p < 0.05; *** p < 0.01.

35
See Table C in Appendix for the complete output

54
Table 9
Time-series cross-sectional regressions for daily abnormal returns on ESG score

(1) (2) (3)

Dependent variable Daily abnormal Daily abnormal Daily abnormal
return return return

ESG_Score 0.00312* / /
(2.336)

ESG_ TopRanked _FirstQuartile / 0.139056* /

(2.212)

ESG_ TopRanked _Median / / 0.10628

(1.93)

Country FE Yes Yes Yes

Sector FE Yes Yes Yes

N 63,126 63,126 63,126

R2 0.0009 0.001041 0.001023

This table reports the results of TSCS regressions of the first quarter 2020 daily abnormal returns on
companies’ ESG score (see Equation 1) and on a dummy variable ESG (see Equation 1.2) under three
different specifications: using the ES score as explanatory variable and adding country and sector fixed
effects (column 1); using a dummy variable with value 1 for first 251 companies (first quartile) in terms
of ES score and 0 for others 751 and adding country and sector FE (column 2); using a dummy variable
with value 1 for first 501 companies (median) in terms of ES score and 0 for others 501 and adding country
and sector FE (column 2). The regression constant is not reported for brevity because is not interesting.
Errors are heteroskedasticity robust. The numbers in parenthesis represents t-statistics.
*p < 0.1; **p < 0.05; *** p < 0.01.

We conduct the same robustness test for difference-in-differences analysis where we first need to
make adjustments to my sample. In fact, we reorder the sample according to the ESG score and we
assign to the first quartile (the 251 companies with the highest ESG scores) the value 1 for the
ESG_dummy variable and 0 otherwise and rerun the test of the difference-in-differences

55
regressions. As shown in Table 10 the interaction coefficient decreases from 0.25% to 0.20% and
is no longer significant at any at 10%. We also perform a further analysis here by assigning the
dummy ES_TopRanked value 1 to the first half of the median (first 501 companies) and 0 to the
remainder. The results are more or less the same with the resilience coefficients (about 0.19%) still
not significant, so they are not reported.

Table 10
Difference-in-differences regressions for daily abnormal returns – ESG analysis

(1) (2)
Dependent variable Daily abnormal return Daily abnormal return

ESG_TopRanked*Post_COVID 0.2020 0.2022

(1.584) (1.579)

ESG_TopRanked 0.079 /
(0.923)

Post_COVID -0.395*** /
(-6.749)

Company FE No Yes

Day FE No Yes

Country FE Yes Yes

Sector FE Yes Yes

N 63,126 63,126

R2 0.00183 0.01248

This table reports the results of difference-in-differences regressions of daily abnormal returns during
the first quarter of 2020 (from 03.01.2020 to 31.03.2020). ESG_TopRanked equals one for high ESG
firms (first quartile) and zero otherwise. Post_COVID equals one from February 24 to March 31 2020
and zero before this period (from 03.01.2020 to 23.02.2020). In specification (1) Country and Sector
fixed effects are included but Company and Day fixed effects not. In specification (2) Company and
Day fixed effects are include so ESG_TopRanked and Post_COVID are removed. The estimated
coefficients for ESG_TopRanked, Post_COVID and their interaction are expressed in percentage. The
numbers in parentheses are t-statistics. The regression constant is not reported for brevity.
*p < 0.1; **p < 0.05; *** p < 0.01. 56
 The already weak resilience of high ES European stocks relative to other stocks becomes smaller
when the governance factor is included. This means that if there has been a slight form of resiliency,
it has been prevalently in relation to companies engaged in environmental and social activities.

5.3 Eurozone and most important countries sub-analysis

In previous robustness tests, the observed sample is always the main sample including the 1,002
companies from the 27 EU countries.

Now we decide to do two sub-analyses: one for companies in Eurozone countries only and another
for companies from the most important Eurozone countries (France, Germany, Italy, Netherlands
and Spain). For the first our sample decrease from 1,002 to 726 companies. The most represented
countries in this sample - Germany (169), France (138), Italy (94), Spain (66), Netherlands (60)
cover about 73% of the sample. What is noteworthy is that the average ES point increases
compared to the original sample (from 55.48 to about 59.24) and the same is observed when
taking the average of the first quartiles (from 77.68 to about 85.12)36. In the second sub-
analysis I then look at the 527 companies of France, Germany, Italy, Netherlands and Spain. In
this case we observe an average ES score of 60.92 and 86.18 for the first quartile, practically the
same as in the analysis of the whole Eurozone.

Regarding the Eurozone sub-analysis, the results of the cross-sectional regressions on quarterly
abnormal returns are reported in Table 11(a). We note that the coefficient associated to the ES score
does not change (0.13% compared to 0.12% before, both significant at 10%) despite the increase
in the average ES score37. On the other hand, the coefficients obtained through the analyses with
the dummy variables are not significant (see columns 2 and 3). Looking at the cross-sectional
analysis of daily abnormal returns in Table 12(a) the results are confirmed and even strengthened.

36
Similarly, we see an increase in the average ES score for the Eurozone sample if instead of the first
quartile I look at it for the first half of the sample (from about 71 to 77).
37
See Table D in Appendix for the complete output
57
The ES score coefficient is again positive and significant at 10% (column 1) and even when we use
the dummy for the first quartile of the best firms by ES score we observe a positive and significant
coefficient at 10% (column 2). The latter drops a bit and is no longer significant if we take the
median instead of the first quartile (column 3).

As regards the second sub-analysis of France, Germany, Italy, Netherlands and Spain the results
are reported in Table 11(b) and Table 12(b). In this case, with the cross-sectional regressions on
quarterly abnormal returns the coefficient associated with the ES score does not remain stable but

Table 11(a)
Cross-sectional regressions for quarterly abnormal returns – Eurozone

(1) (2) (3)

Dependent variable Quarterly Quarterly Quarterly
Abnormal return Abnormal return Abnormal return

ES_Score 0.13654* / /
(2.212)

ES_TopRanked_FirstQuartile / 5.156 /
(1.614)

ES_ TopRanked _Median / / 4.8165

(1.735)

Country FE Yes Yes Yes

Sector FE Yes Yes Yes

N 726 726 726

R2 0.2238 0.2212 0.2217

This table reports the results of cross-sectional regressions of the first quarter 2020 abnormal returns of
Eurozone companies on their ES score (see Equation 1) and on a dummy variable ES (see Equation 1.2)
under three different specifications: using the ES score as explanatory variable and adding country and sector
fixed effects (column 1); using a dummy variable with value 1 for first 182 companies (first quartile) in
terms of ES score and 0 for others 544 and adding country and sector FE (column 2); using a dummy variable
with value 1 for first 363 companies (median) in terms of ES score and 0 for others 363 and adding country
and sector FE (column 2). The regression constant is not reported for brevity because is not interesting.
Errors are heteroskedasticity robust. The numbers in parenthesis represents t-statistics.
*p < 0.1; **p < 0.05; *** p < 0.01. 58
rather it drops to 0.082 and is no significant at any level of confidence (see Table 12 (b) column
1), despite the fact that the average ES score is practically identical. The reduction of the sample
does not explain the decrease of the coefficient, as the R2 is more or less the same. However, these
results are refuted by the cross-sectional analysis of daily abnormal returns shown in Table 12(b).

Table 11(b)
Cross-sectional regressions for quarterly abnormal returns - Most important Eurozone
countries in terms of GDP (France, Germany, Italy, Netherlands, Spain)

(1) (2) (3)

Dependent variable Quarterly Quarterly Quarterly
abnormal return abnormal return abnormal return

ES_Score 0.08251 / /
(1.343)

ES_ TopRanked _FirstQuartile / 3.3218 /

(1.034)

ES_ TopRanked _Median / / 2.761

(0.995)

Country FE Yes Yes Yes

Sector FE Yes Yes Yes

N 527 527 527

R2 0.2863 0.2852 0.2851

This table reports the results of cross-sectional regressions of the first quarter 2020 abnormal returns of most
important Eurozone countries in terms of GDP (France, Germany, Italy, Netherlands, Spain) companies on
their ES score (see Equation 1) and on a dummy variable ES (see Equation 1.2) under three different
specifications: using the ES score as explanatory variable and adding country and sector fixed effects (column
1); using a dummy variable with value 1 for first 132 companies (first quartile) in terms of ES score and 0 for
others 395 and adding country and sector FE (column 2); using a dummy variable with value 1 for first 264
companies (median) in terms of ES score and 0 for others 264 and adding country and sector FE (column 2).
The regression constant is not reported for brevity because is not interesting. Errors are heteroskedasticity
robust. The numbers in parenthesis represents t-statistics.
59
*p < 0.1; **p < 0.05; *** p < 0.01.
Table 12(a)
Time-series cross-sectional regressions for daily abnormal returns – Eurozone

(1) (2) (3)

Dependent variable Daily abnormal Daily abnormal Daily abnormal
return return return

ES_Score 0.00329* / /
(2.038)

ES_ TopRanked _FirstQuartile / 0.15996* /

(2.205)

ES_ TopRanked _Median / / 0.14386

(1.728)

Country FE Yes Yes Yes

Sector FE Yes Yes Yes

N 45,738 45,738 45,738

R2 0.00087 0.00088 0.00084

This table reports the results of TSCS regressions of the first quarter 2020 daily abnormal returns of Eurozone
companies on their ES score (see Equation 1) and on a dummy variable ES (see Equation 1.2) under three
different specifications: using the ES score as explanatory variable and adding country and sector fixed
effects (column 1); using a dummy variable with value 1 for first 182 companies (first quartile) in terms of
ES score and 0 for others 544 and adding country and sector FE (column 2); using a dummy variable with
value 1 for first 363 companies (median) in terms of ES score and 0 for others 363 and adding country and
sector FE (column 2). The regression constant is not reported for brevity because is not interesting. Errors
are heteroskedasticity robust. The numbers in parenthesis represents t-statistics.
*p < 0.1; **p < 0.05; *** p < 0.01.

Table 12(b)
Time-series cross-sectional regressions for daily abnormal returns - Most important
Eurozone countries in terms of GDP (France, Germany, Italy, Netherlands, Spain)

60
 (1) (2) (3)
Dependent variable Daily abnormal Daily abnormal Daily abnormal
return return return

ES_Score 0.00283** / /
(3.057)

ES_ TopRanked _FirstQuartile / 0.11852** /

(2.834)

ES_ TopRanked _Median / / 0.11139*

(2.299)

Country FE Yes Yes Yes

Sector FE Yes Yes Yes

N 33,201 33,201 33,201

R2 0.003646 0.003606 0.003524

This table reports the results of TSCS regressions of the first quarter 2020 daily abnormal returns of most
important Eurozone countries in terms of GDP (France, Germany, Italy, Netherlands, Spain) companies on
their ES score (see Equation 1) and on a dummy variable ES (see Equation 1.2) under three different
specifications: using the ES score as explanatory variable and adding country and sector fixed effects
(column 1); using a dummy variable with value 1 for first 132 companies (first quartile) in terms of ES score
and 0 for others 395 and adding country and sector FE (column 2); using a dummy variable with value 1 for
first 264 companies (median) in terms of ES score and 0 for others 264 and adding country and sector FE
(column 2). The regression constant is not reported for brevity because is not interesting. Errors are
heteroskedasticity robust. The numbers in parenthesis represents t-statistics.
*p < 0.1; **p < 0.05; *** p < 0.01.

Regarding the difference-in-differences implementation for the Eurozone sub-analysis, the sample
is reduced to 726 firms (182 top-ranked ES) and 45,738 daily observations while for most important
Eurozone countries to 527 firms (132 top-ranked ES) and 33,201 daily observations. Table 13
shows the results of this sub-analysis. The interaction coefficient for top ES stocks firms drops
significantly from 0.25% in the analysis for the 27 EU companies to 0.09% of Eurozone companies
and becomes no longer significant not even to the 10% level of significance. Similar is the result
obtained for companies in France, Germany, Italy, Netherlands and Spain alone. In fact the
61
coefficient associated with the interaction between post COVID period and ES score is about 0.11%
and in any case not significant.

We also perform a further analysis here by assigning the dummy ES_TopRanked value 1 to the first
half of the median and 0 to the remainder. The results are more or less the same with the resilience
coefficients still not significant, so they are not reported.

Table 13
Difference-in-differences regressions for daily abnormal returns – Eurozone (column 1) Most
important Eurozone countries in terms of GDP (column 2)

(1) (2)
Dependent variable Daily abnormal return Daily abnormal return

ES_TopRanked*Post_COVID 0.0906 0.1153

(0.842) (1.26)

ES_TopRanked 0.1068 0.1135

(1.009) (1.821)

Post_COVID -0.4469*** -0.3201***

(-5.604) (-6.987)

Country FE Yes Yes

Sector FE Yes Yes

N 45,738 33,201

R2 0.0016 0.0052

This table reports the results of difference-in-differences regressions of daily abnormal returns during the
first quarter of 2020 (from 03.01.2020 to 31.03.2020) for Eurozone companies in specification (1) and for
most important European countries in terms of GDP (France, Germany, Italy, Netherlands and Spain) in
specification (2). ES_TopRanked equals one for high ES firms (first quartile) and zero otherwise.
Post_COVID equals one from February 24 to March 31 2020 and zero before this period (from 03.01.2020
to 23.02.2020). Country and Sector fixed effects are included in both specifications. The estimated
coefficients for ES_TopRanked, Post_COVID and their interaction are expressed in percentage. The
numbers in parentheses are t-statistics. The regression constant is not reported for brevity. *p < 0.1; **p <
0.05; *** p < 0.01.

62
6. Discussion of results
Summing up the results reported in the previous section, we can say that a form of resilience of the
stocks of companies with high ESG scores during the market crash due to the outbreak of the
COVID-19 pandemic was present, although not as strong as that observed in the US market. All
model used - cross-sectional, time-series cross-sectional and difference-in-differences regressions
- revealed this trend. The first cross-sectional analysis told us that during the entire period from
January 2020 to the end of March 2020, for an increase of one unit in the ES score an abnormal
return of about 0.123% was observed on average in the 1,002 companies of the 27 European
countries (see Table 3). The same ES score is not found to be a source of outperformance for the
same firms in the first quarter of 2019 and 2021, i.e. one year before and one year after our period
of interest (see Table 6a and Table 6b). Furthermore, by adding the governance factor and thus
taking the whole ESG score, this result does not change but rather the coefficient linked to the ESG
score rises slightly (about 0.14%) as shown in Table 8. When instead of the ES (or ESG) score we
use dummy variables with a value of 1 for the top ES companies and 0 for the others, we do not
initially obtain significant results.

When we implement the time-series cross-sectional analysis, for each point above the ES score we
observe an average daily outperformance of 0.003% significant at the 10% level. When using
dummies the trend is confirmed as the top 251 ES firms show abnormal returns of 0.18%
(significant at 5%) per day higher than the others, 0.13% if we differentiate between the top 501
and the rest (Table 4 shows these results). Again, as we see from Tables 7a and 7b there is no trace
of daily outperformance for the quarters 2019 and 2021. However, the addition of the governance
factor decreases these differences in daily abnormal returns in the specifications with dummy
variables (see Table 9), while when we control for the subsamples of the Eurozone and the main
countries by GDP the results are rather stable (see Table 12a and Table 12b).

Finally, let's look at what difference-in-differences analysis has given us. Compared to the daily
cross-sectional analysis, this model differentiates between the pre- and post-pandemic outbreak
period, which we mark with the date 24 February 2020. From Table 5a we see that European firms
suffer an abnormal return of around -0.41% per day since the outbreak of the pandemic but the top
63
251 by ES score mitigate this effect by showing a daily outperformance of 0.25% compared to all
others. Resilience declines and is no longer significant when looking at the top 501 and the
abnormal return also deteriorates further (-0.45% approximately) as shown in Table 5b. Here again,
the addition of the governance factor has a negative effect as the resilience effect drops and is no
longer significant.

There are other observations and suggestions for further study to be made. Regarding the source of
the ESG data used in this research, as mentioned in the section on the weaknesses of ESG ratings,
there are large discrepancies in ratings among different rating providers, and therefore using
different measures of social responsibility could provide different results. So, it would be
interesting to reconduct the analysis using different ESG databases. Also, we focused on the ES
score, since these two scores are highly correlated, that differentiating these should not bring any
added value to the study whereas considering also the governance pillar might lead to rather
different results. When we repeated the tests considering ESG scores and not only ES scores we
got almost identical results in the cross-sectional analysis while in the difference-in-differences
analysis we noticed an important decrease in the coefficient representing the resilience effect of
companies with high ESG scores. Some sort of evidence of the negative effect of the governance
pillar in Europe has already been provided by other authors and it might be interesting to explore
this issue further.

64
7. Conclusion
In the first quarter of 2020, the outbreak of the COVID-19 pandemic induced an exogenous shock
to the economy, causing a sudden and severe market crash around the world, and this in fact created
a good opportunity to study once again what is the link between financial performance and ESG
performance. Previous work has taken advantage of the situation to investigate this link, but with
mixed results: investigating the US market Albuquerque et al. (2020) find evidence of significant
outperformance of firms with higher ES scores than the others; Broadstock et al. (2021) studying
the Chinese market observe that ESG scores and stock returns are positively associated; Takahashi
and Yamada (2021) investigating the same for the Japanese market, however, found no evidence
of a link between ESG scores and stock's returns. The European market has therefore not been
investigated and we went to fill this gap. In particular, the focus of our study was on companies
with headquarters in the 27 countries of the European Union with sub-analyses for the Eurozone
alone and the main Eurozone countries. Our evidences, on the whole, shows a positive and
significant association (although not at all levels of significance) between a European company's
Environmental and Social (ES) performance and its financial performance during the onset of the
pandemic crisis. When the governance factor is included, the resilience effect drops significantly,
confirming the fact that this factor has a negative effect in Europe.

Our results confirm those observed by Broadstock et al. (2021) for the Chinese case whereby the
outperformance of companies with higher ESG scores occurs in the crisis period while it disappears
in the normal period. This evidence supports the already professed thesis in the literature that high
ESG performance stocks act as a refuge in times of crisis (Engle et al., 2020) performing almost
like an insurance function in the sense that buying stocks of companies with a high ESG score the
investor could protect himself better from large market crashes, but he has to pay for this
outperformance with an underperformance after the crash.

The resilience effect observed in Europe is far weaker than that seen in the US: this confirm the
evidences of Bannier, Bofinger and Rock (2018) . They showed that the insurance function of
ESG equities is present in both the US and Europe but tends to become more pronounced as
turbulence increases only in the US, while it remains fairly stable in Europe. We think that one

65
possible explanation for this is due to the structural differences between the two geographic areas
and therefore the reference markets. In fact, in the United States we have a single market to which
all companies are linked and investors cannot diversify - and therefore protect themselves - by
investing in different countries, which is possible when investing in Europe. To be clear, investors
who want to invest in the top ESG companies in the US food and beverage sector will more or less
all focus on the same group of companies, while investors who want to do the same but in Europe
can diversify by investing in the best Italian, German, Swedish, etc. ESG companies in the food
and beverage sector.

The fact that companies with high ESG scores perform better only in times of crisis is vital to the
development of the whole theory of corporate social engagement and financial performance. When
discussing the link between ESG performance and financial performance the most complex
question is certainly identifying the direction of causality i.e. whether it is companies with
strong financial performance can afford to pursue ESG activities or whether it is true that ESG
activities create value for companies. Here is where testing this theory again and perhaps
confirming it would lead to the definitive resolution of this dilemma.

66
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Appendix

Table A
Cross-sectional regressions for quarterly abnormal returns with ES score as independent
variable and controls for countries and sectors fixed effects

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Table B
Cross-sectional regressions for quarterly abnormal returns with ESG score

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Table C - Eurozone
Cross-sectional regressions for quarterly abnormal returns of Eurozone

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