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The day after #3 - ESG Resilience During the Covid Crisis: Is Green the New Gold?



Without a doubt, the coronavirus is shaking the financial industry like never before. This is not the first time the world has faced a pandemic of this scale, nor is the first time that policy makers, business leaders and pundits have asked: “Is it different this time around? Are we at a turning point?”

As serious economic consequences of the Covid-19 crisis are affecting businesses unevenly, companies integrating an ESG approach recognised by investors and ESG funds have been more resilient in the recent crisis period.


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Pandemic: a neglected risk

On 23 February 2020, when Italy announced the Lombardy lockdown, and then on 11 March 2020, when the World Health Organization classified Covid-19 as a pandemic, what started as an emerging disease in China in a few weeks turned into one of the most serious health crises ever known. Equity markets across all financial centres plunged.

The magnitude of the reaction is commensurate with the severity of the social and economic shock, but it is also related to the fact that the markets were taken by surprise and are not set up to anticipate shocks of this nature. Although epidemics are not without precedent in recent history (SARS in 2002, H1N1 in 2010, Ebola in 2014, and MERS in 2019), and although pandemic risk had been identified in many prospective studies — for example, in the work of the national security agencies of large Western democracies, the risk of a pandemic was not on the list of the 10 most probable risks cited in the World Economic Forum’s 2020 “Global Risk Report”2 published in January 2020. Respondents to the survey cited climate risks, followed by cyber risks, as top concerns. Searches for the term ‘epidemic’ on Google (worldwide) were also relatively rare before the onset of the Covid-19 outbreak. Covid-19, due to its magnitude, represents an extreme situation.

The world has been caught by surprise: a global pandemic was not among top risks for investors. 


Serious economic consequences are affecting businesses unevenly

Academic work is emerging that assesses the potential macroeconomic impact of the pandemic (Barro et al, 20203; Gourinchas, 20204; Eichenbaum et al. (2020)5). Estimates are difficult to make because the magnitude of the impact depends on the spread of the disease (sick people no longer contribute to GDP), but also, and above all, on political responses to limit the contagion. For example, containment measures, national and international traveling restrictions, and border closures reduce household spending and firms’ production capacity while supportive measures help maintain wages and firms’ access to credit, avoid layoffs, disruptions in production chains, and cascading bankruptcies, and thus theoretically reduce the severity of the crisis. But the political responses are endogenous and themselves depend on the scale of the epidemic and the anticipated economic impact.

Furthermore, the effect of the crisis on short-and medium-term net savings is subject to potentially contradictory developments: an increase in short-term savings due to limitations on the propensity to consume, and the possible use of the accumulated savings thereafter, but without any certainty on how much will be used. Further, the uncertainty surrounding the development of the health and economic situations may exacerbate the negative impact of the crisis6.

At the corporate level, this macroeconomic shock is manifesting in different ways. For example, it is disrupting production chains and causing labour shortages, closures of production facilities, falls in demand, and difficulties in accessing credit lines. The high degree of uncertainty surrounding the shock has led many investors to massively divest from financial assets considered risky, in particular equities, and to rush into cash. But the impact of the crisis so far has been very different, both across and within sectors. Ramelli and Wagner (2020)7 analyse the impact of the crisis on the US stock markets between 2 January and 20 March 2020.

By sector, pharma, telecom, food and staples retailers did relatively well while energy, consumer services, consumer durables, and real estate firms suffered particularly. Within sectors, companies whose business is more exposed to China and to international trade in general were particularly affected in the initial phases of the crisis, between 2 January and 20 February 2020. After the beginning of the outbreak in Europe and the announcement of the first containment measures in Italy on 23 February, investors started to discriminate between companies on the basis mostly of their levels of debt and cash holdings. These patterns also reflected in corporate conference calls. While analysts were initially concerned mainly about international trade, they later turned their attention to liquidity issues. Also, companies that have been exposed to previous epidemics were considered less vulnerable by analysts (Hassan et al., 2020)8.


Companies integrating an ESG approach recognised by investors and ESG funds have been more resilient in the recent crisis period

Before the current pandemic crisis, corporate social responsibility (CSR) had already become a major investment criterion, significantly influencing the valuation of financial assets in both the equity and debt markets. Several recent studies have shown that companies with better extra-financial («ESG») performances saw their share prices increase more than those of their competitors. This phenomenon was probably mainly due to demand from investors, ie, investors increasingly integrating these issues into their investment decisions. What about the recent pandemic crisis?

The MSCI World index dropped 14.5% in March, but 62% of large-cap ESG funds outperformed the index9. Forty-two percent of funds (open-ended funds and ETFs available in the US market) were ranked in the first quartile of their category, according to Morningstar10. This outperformance is partly due to the exposure of these funds to sectors less impacted by containment and social distancing measures, such as tech or telecoms, but not only these issues. Investment flows into ESG funds were also much more resilient during the crisis.

We analysed investment flows in 1,662 ETFs listed in the US market, including 75 ETFs classified ESG, 24 specialised in environmental issues (low-carbon, water, clean energy, etc), 53 specialised in healthcare and 30 in tech11. Cumulative flows have continued to increase throughout the crisis period, while massive sales occurred after the initial phase of the Italian lockdown in traditional equity ETFs, but also for ETFs specialised in sectors with little exposure, such as tech, and to a lesser extent, healthcare (see Figure 2).



This resilience of ESG funds is not completely new. During the subprime crisis, we witnessed a comparable phenomenon, but on a smaller scale. For example, the average growth rate of the shares outstanding of US-listed ETFs was on average 1.7 times higher for ESG equity funds than for conventional equity funds during the subprime crisis (daily growth of 0.80% for ESG funds vs 0.46% for conventional funds), whereas it was only 1.3 times higher before the crisis. During the Covid-19 crisis, this daily growth rate was 4.6 times higher for ESG vs conventional funds (1.28% vs 0.28%), against 1.3 between the two crises (see Table 1).

There are several possible reasons for the resilience of ESG funds’ flows. On the one hand, it is possible that investors have perceived ESG as ‘pandemic-proof’ funds. By construction, ESG funds tend to overweight sectors that have weathered the crisis better, such as healthcare and tech, and underweight those that have been most impacted, such as transport, energy, materials, etc.

Another reason may come from a segregation of the two markets. Investors with different  investment characteristics and strategies can invest separately in the ESG and conventional ETF market segments. Thus, investors with shorter horizons and higher liquidity needs could position themselves in conventional equity ETFs, with larger traded volumes and higher liquidity, explaining a massive disinvestment from these funds during crises, while investors with longer horizons could remain invested in ESG funds.

Finally, it is possible that investors have shown greater ‘loyalty’ to their ESG investments. Bollen et al (2007)12 showed that flows into ESG mutual funds are more sensitive than conventional funds to positive past returns, but less sensitive to negative returns. An assumption consistent with this behaviour is that investors derive positive utility from the simple act of investing responsibly, which can compensate for the disutility associated with negative performance, and lead them to keep their investments during crises.

There is one final reason. Even without particular loyalty, ESG funds may have benefited from investor preference and played the role of safe havens within equity  markets for the sole reason that investors anticipate that others will do the same. Such conventional preferences usually manifest themselves during crises in terms of capital shifts between asset classes but also within each asset class among different market segments: for example, within government bonds, between on-the-run and off-the-run securities, or between nominal and inflation-indexed bonds13. In the Covid-19 crisis — which  clearly has strong social and environmental implications — it seems investors perceived a strong ESG performance as a defensive characteristic.

The impact of Covid-19 crisis so far has been very different, both across and within sectors.


Outlook on future ESG trends

The Covid-19 crisis has moved social considerations back to the forefront of ESG. Companies’ decisions affecting workers (in particular, the health and social protection of employees, telework or unemployment policies, as well as providing production chains to produce medical equipment) have become increasingly important. This is illustrated, for example, by the reactions of Amazon’s share price to the controversies over the working conditions of its employees during the crisis, but also by the numerous press articles on Covid-related CSR policy. Companies’ environmental and climatic action could also be better valued by market participants. It is becoming impossible to argue that investors do not have to worry about the environmental externalities generated by companies. The Covid-19 situation reminds us that natural disasters can happen suddenly and unexpectedly, and that we are more vulnerable than we previously would have imagined.

It is difficult to predict today if ESG issues will continue to be a priority for investors, considering the major economic and financial issues we are going to face in the next few years. But our analysis suggests that investors’ taste for ESG has not decreased during this crisis — quite the opposite, in fact. In this sense, we hope that the recent trends we have observed on ESG assets will continue and amplify in the months to come.



1.The authors would like to thank Monica Defend and Stefano Ramelli for their useful comments.
2. https://www.weforum.org/reports/the-global-risks-report-2020
3. Barro RJ, Ursúa JF and Weng J. The coronavirus and the great influenza pandemic: Lessons from the “Spanish flu” for the coronavirus’s potential effects on mortality and economic activity. No. w26866. National Bureau of Economic Research, 2020
4. Gourinchas PO. Flattening the pandemic and recession curves. In Mitigating the COVID Economic Crisis: Act Fast and Do Whatever it Takes, 2020
5. Eichenbaum MS, Rebelo S and Trabandt M. The macroeconomics of epidemics. No. w26882. National Bureau of Economic Research, 2020
6. Barro et al (2020) estimated the economic impact of the Spanish flu epidemic, which killed 39 million people from 1918 to 1920. The average GDP per capita of the 43 countries in the study fell by 6%. Gourinchas (2020) estimates a reduction in US GDP of 6.5% compared to 2019, for a two-month confinement, and 10% for three months. Current containment measures are helping to flatten the epidemic’s curve, but can also accentuate the severity of the recession. Ultimately, the optimal containment policy from an economic point of view depends on trends in the epidemic and the related economic impact. The estimates of Eichenbaum et al (2020), which are based on a canonical epidemiology model expanded with the modeling of interactions between economic decisions and epidemics, show that an optimal containment saves 0.6 million lives in the US, but amplifies the severity of the recession by reducing consumption from 2% (without containment) to 9% (with containment).
7. Ramelli S and Wagner AF. Feverish stock price reactions to Covid-19. 2020
8. Hassan TA, Hollander S, van Lent L and Tahoun A. Firm-level Exposure to Epidemic Diseases: COVID-19, SARS, and H1N1, 2020
9. See Financial Times article: https://www.ft.com/content/46bb05a9-23b2-4958-888a-c3e614d75199
10. https://www.morningstar.com/articles/972475/sustainable-equity-funds-are-outperforming-in-bear-market
11. The choice to focus on ETFs, while not including the broader mutual fund market in the analysis, is due to the availability, almost in real time, of flow data for ETFs while there is a much longer lag for mutual funds.
12. Bollen NP. Mutual fund attributes and investor behavior. Journal of Financial and Quantitative Analysis, 42(3), 2007
13. Briere M and Signori O. Do Inflation-Linked Bonds Still Diversify? European Financial Management, 15(2), 2009

BARBERIS Jean-Jacques , Head of Institutional and Corporate Clients Coverage
BRIERE Marie , Head of the Investor Research Center
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The day after #3 - ESG Resilience During the Covid Crisis: Is Green the New Gold?
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