This study examines whether firms with higher Environmental, Social and Governance (ESG) ratings demonstrate greater downside resilience during periods of market stress. The motivation for the study comes from the growing use of ESG ratings in financial markets and the lack of agreement in existing research on whether ESG actually protects firms when markets decline. Using firm level ESG data from LSEG for companies listed in the S&P 500 and STOXX Europe 600 the study focuses on two crisis periods the Global Financial Crisis and the COVID-19 pandemic. Firms are classified into high and low ESG groups based on their LSEG grade in the year prior to each crisis and stock returns are used as the main measure of firm resilience. A Difference in Difference regression is estimated for each crisis. The analysis draws on two competing theoretical perspectives, the insurance effect which predicts that strong ESG performance builds stakeholder trust and reduces downside risk and the ESG irrelevance view which argues that investors prioritize traditional financial indicators during crises making ESG ratings less meaningful.
The results do not provide consistent support for either hypothesis across the two crisis periods. During the COVID-19 pandemic high ESG firms experienced significantly larger declines in stock returns compared to low ESG firms with the interaction term estimated at -0.142 and significant at the 1% level. This result supports the ESG irrelevance view and is in line with previous research suggesting that traditional financial factors remain more important during acute market stress. During the Global Financial Crisis both high and low ESG firms experienced similarly large losses with an interaction term of +0.068 that does not reach statistical significance. Together the findings suggest that the protective role of ESG is not universal and depends heavily on the nature and context of the crisis.