Circular Economy, Stock Volatility and Resilience to the COVID-19 Shock: Evidence from European Companies

Submitted to Quarterly Journal of Finance in Dec. 2021

52 Pages Posted: 25 Oct 2021 Last revised: 30 Jul 2022

See all articles by Claudio Zara

Claudio Zara

Bocconi University - Department of Finance; GREEN Research Centre - Bocconi University

Luca Bellardini

Bocconi University - GREEN Research Centre

Margherita Gobbi

Bocconi University

Date Written: October 22, 2021


Background. By decoupling economic growth from an intensive use of resources, preventing the impairment of natural capital, and enhancing resilience to system-wide shocks, Circular Economy (CE) is a powerful opportunity for economic agents willing to hedge against “sustainability” risk factors. In fact, it helps shielding against the risk of assets becoming stranded, can generate fresh and non-speculative demand for investments, and can improve companies’ results at both individual and portfolio levels. Problem. Therefore, equity investors into circular un- dertakings could benefit from (H1) reduced stock return volatility, as well as (H2) a greater ability to withstand exogenous negative events. Approach. For testing these hypotheses, we constructed a sample of ~600 listed com- panies across EU-15 countries, plus Switzerland, and 17 resource intensive industries. We retrieved their market data in 2019-20, as well as their accounting fundamentals in 2018-19. By controlling for the latter, we investigated whether market-based risk — either in total terms (i.e., the standard deviation of returns) or circumscribed to the systematic component thereof (i.e., the Beta against both a European and global market index) — may be explained by a company’s degree of circularity, measured by the Circularity Score (CS). This is a novel indicator originally proposed by Zara et al. (2020), based on selected indicators included in the Refinitiv ESG dataset. As a core improvement, in weighting an entity’s circular performance, we assessed the latter’s ‘financial materiality’ (i.e., relevance to the company’s business) at sub-industry level, applying the SASB Materiality Map. Methodology. Via OLS estimation, we tested our hypotheses (i) over the whole-time horizon, in a pooled model; (ii) on specific timeframes, in a standard cross-sectional model. The latter was applied to either the entire 2020 or subperiods thereof: namely, with respect to the COVID-19 outbreak, we distinguished between a pre-shock, a shock and a post-shock phase, as proposed in Ramelli and Wagner, 2020. Our quest was refined to conduct a deeper investi- gation into the Oil & Gas industry, which is intrinsically the most exposed to sustainability risks and, also, did experience the widest volatility in 2020. Findings. Both H1 and H2 received widespread confirmation. The CS was found to exert a widespread negative, significant and robust effect on all the risk measures, regardless of the timespan considered. Also, amplifying effects were recorded as of the Oil & Gas industry. Conclusions. Our results lend remarkable support to the idea that the CE can be a powerful de-risking strategy, also in case of a severe shock, with a view to mitigating the negative consequences and building back better. They call on firms and policymakers to foster the circular transition, thereby accelerating economic recovery in the aftermath of the pandemic crisis.

Keywords: de-risking, equity risk, COVID-19, circular finance, sustainable finance, public equity, circularity metrics

JEL Classification: G01, G11, G32, Q56

Suggested Citation

Zara, Claudio and Bellardini, Luca and Gobbi, Margherita, Circular Economy, Stock Volatility and Resilience to the COVID-19 Shock: Evidence from European Companies (October 22, 2021). Submitted to Quarterly Journal of Finance in Dec. 2021, Available at SSRN: or

Claudio Zara (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136

GREEN Research Centre - Bocconi University ( email )

via Roetgen 1
Milano, Milano 20136

HOME PAGE: http://

Luca Bellardini

Bocconi University - GREEN Research Centre

Via Röntgen, 1
Milan, MI 20136


Margherita Gobbi

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136

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