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Is Corporate Social Responsibility investing a free lunch? The relationship between ESG, tail risk, and upside potential of stocks before and during the COVID-19 crisis

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  • Lööf, Hans

    (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)

  • Sahamkhadam, Maziar

    (Linnaeus University)

  • Stephan, Andreas

    (Jönköping International Business School and CESIS, KTH)

Abstract

Did Corporate Social Responsibility investing benefit shareholders during the COVID-19 pandemic crisis? Distinguishing between downside tail risk and upside reward potential of stock returns, we provide evidence from 5,073 stocks listed on stock markets in ten countries. The findings suggests that better ESG ratings are associated with lower downside risk, but also with lower upside return potential. Thus, ESG ratings help investors to reduce their risk exposure to the market turmoil caused by the pandemic, while maintaining the fundamental trade-off between risk and reward.

Suggested Citation

  • Lööf, Hans & Sahamkhadam, Maziar & Stephan, Andreas, 2021. "Is Corporate Social Responsibility investing a free lunch? The relationship between ESG, tail risk, and upside potential of stocks before and during the COVID-19 crisis," Working Paper Series in Economics and Institutions of Innovation 488, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    • Handle: RePEc:hhs:cesisp:0488
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    More about this item

    Keywords

    ESG; COVID 19; downside risk; upside potential; Sustainalytics; financial markets;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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