Investors reward environmental responsibility in the COVID-19 crisis

Alexandre Garel, Arthur Petit-Romec 21 July 2020



Whether and how the COVID-19 crisis will affect the future of climate actions is among the key issues for policymakers, corporate leaders, and investors alike. Before COVID-19, climate change and the large financial risks it conveys were perceived as a major threat for the economy (Carney 2015), and increasingly integrated by investors and firms (Krueger et al. 2020). However, within a few weeks, attention changed dramatically: the COVID-19 pandemic and its unprecedented financial consequences quickly became the most salient preoccupation for investors and firms (Baldwin and Weder di Mauro 2020a, 2020b). In the midst of the crisis, several global business sectors have even called for a suspension of environmental protections to allow business to bounce back faster.

It is hence valid to ask if the COVID-19 outbreak has distracted investors’ attention away from environmental issues, as they were suddenly perceived as less urgent? Or if on the contrary, the COVID-19 outbreak actually reinforced the value that investors place on responsible initiatives on environmental and climate issues? In a recent paper, we provide insights on these questions by studying the cross-section of stock price reactions to the COVID-19 shock (Garel and Petit-Romec 2020).

Specifically, using data from Thomson Reuters Asset4 ESG database for a sample of large US listed companies, we examine whether a firm’s environmental score affects its stock market reaction to the COVID-19 shock. The environmental score measures a firm’s commitment and effectiveness towards adopting responsible initiatives and strategies on environmental issues including the reduction of environmental emissions (e.g. greenhouse gases, ozone-depleting substances) and the efficient use of natural resources in the production process. In line with other studies (e.g. Ramelli and Wagner 2020, Fahlenbrach et al. 2020) and the graphical examination of the time series of major US indexes, we define the COVID-19 shock as the period between 20 February and 20 March 2020.

The figure below shows the average industry-adjusted stock returns for firms sorted by quartile of environmental scores. It provides preliminary evidence that firms with greater environmental responsibility experience better stock returns during the COVID-19 shock. It also suggests that the association between environmental responsibility and stock returns is driven by the firms with the best environmental performance.

Figure 1 Average industry-adjusted stock returns

In a more formal analysis where we control for standard determinants of the cross-section of stock returns, we find that firms with greater environmental responsibility have better stock returns during the COVID-19 shock. The effect is economically sizeable: a one-standard-deviation increase in environmental responsibility is associated with 1.4 percentage points higher stock returns during the COVID-19 period. In relative terms, the economic effect of environmental responsibility is slightly lower but comparable in magnitude to cash holdings and long-term debt, which are two key determinants of the cross-section of returns during the COVID-19 shock (Fahlenbrach et al. 2020, Ramelli and Wagner 2020). This result is specific to the COVID-19 shock as we do not observe any statistical association between environmental responsibility and stock returns in the pre-COVID period. These findings suggest that the COVID-19 shock has led investors to revise their valuation of responsible initiatives on environmental issues.

Further analysis shows that the association between environmental responsibility and stock returns during the COVID-19 shock is mainly driven by initiatives addressing climate change (e.g. reduction of environmental emissions and energy use). We also observe that the positive association between environmental responsibility and stock returns during the COVID-19 shock is significantly more pronounced for firms with greater long-term investor ownership. This finding is consistent with prior evidence indicating that investors with a long-term orientation are more concerned with environmental responsibility (e.g. Gibson and Krueger 2018, Ramelli et al. 2018).

Overall, our results indicate that firms with greater environmental responsibility experienced better stock returns during the COVID-19 shock. They are inconsistent with the idea that the unprecedented and novel risk posed by the COVID-19 has distracted investors’ attention away from environmental and climate issues. Rather, investors, especially those with a long-term orientation, appear to have rewarded responsible initiatives on environmental issues such as the reduction of environmental emissions. Our results add to recent research showing that climate risk is an important factor affecting the tail risk of stock returns and the pricing of stocks in the cross-section (Bolton and Kacperczyk 2019, Ilhan et al. 2019). They also complement recent studies showing that firms with greater corporate social responsibility performed better during the 2007-08 financial crisis and the COVID-19 crisis (e.g. Lins et al. 2017, Albuquerque et al. 2019, 2020, Ding et al. 2020). Prior studies emphasize that customer loyalty and the trust between a firm and its stakeholders, built through investments in corporate social responsibility (CSR), pay off during crisis periods. During the COVID-19 crisis, we find that only environmental responsibility and not social responsibility is associated with higher stock returns, consistent with investor awareness of environmental and climate issues being much more pronounced today than it was in 2008. In this respect, the COP 21 Paris agreement in 2015 may have played an important part in raising awareness on climate issues.

Although further research is necessary to examine the long-run and realized consequences of the COVID-19 shock on environmental and climate issues (e.g. surge in shareholder activism on environmental issues, increased support for environmental and climate resolutions, adoption of responsible initiatives on environmental and climate issues), our results provide  suggestive evidence that the COVID-19 crisis may mark a turning point in the relationship between environmental responsibility and financial performance as well as in the value that investors attach to climate initiatives. Anecdotal evidence indicates that the first semester of 2020 has already witnessed a surge in climate actions with investors pilling pressure on companies to tackle global warming and climate change resolutions receiving greater support than in 2019.

Our study has implications for both managers and investors. For managers, they imply that companies with responsible initiatives on environmental climate issues are expected to do better in the future. Hence, managers cannot hide anymore behind market forces or the conventional wisdom that pursuing a climate-responsible agenda runs counter the wishes of shareholders and would hurt shareholder value. For investors, they imply that environmental issues and in particular carbon emissions are likely to become an increasingly important factor for portfolio compositions and the pricing of stocks in the post-COVID world.


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Topics:  Covid-19 Environment Financial markets

Tags:  COVID-19, stock market, climate change, climate action

Assistant Professor of Finance, Audencia Business School

Assistant Professor of Finance, SKEMA Business School


CEPR Policy Research