Exploring the relationship between ESG-scores and company performance: Insights from the Covid-19 pandemic

Abstract

This thesis explores the relationship between Environmental, Social, and Governance (ESG) scores and company performance within the S&P 500 and STOXX 600 indexes during the Covid-19 pandemic. We investigated ESG scores and different company attributes using three different OLS regression models on two different time periods. The results from our models reveal a complex correlation between ESG scores and financial performance. Our findings demonstrate a negative relationship between high Bloomberg S pillar scores and cumulative stock returns, implying a potential risk of overinvesting in social incentives. In addition, a positive relationship was proven between Bloomberg E pillar scores and returns in the U.S., suggesting potential benefits from environmental investments. This relationship highlights the market valuation of environmental investments prior to exogenous shocks and how it attracts investors due to a lack of trust in the market. Our research found that moderate ESG-scored portfolios gain better returns, while the immoderate ESG score portfolios showed no correlation. The results further highlight investors' disregard for immoderate ESG-scoring portfolios. Our research offers critical insights into ESG investing behavior under exogenous shocks despite the limitations associated with ESG score standardization.