Are ESG Ratings Informative About Companies' Socially Responsible Behaviors Abroad? Evidence from the Russian Invasion of Ukraine

Abstract

We use the Russian invasion of Ukraine as a revelation of the usefulness of ESG ratings to assess corporate socially responsible behaviors abroad. Using data on Stoxx 600 firms’ Russian exposure, pre-invasion Russia-related disclosures, and ESG scores, our findings are threefold. First, we find that more highly-rated ESG firms were not less likely to operate in Russia nor more likely to meaningfully inform investors about such activities. Second, in response to the Western outrage about the atrocities committed by Russia, many firms scrambled to announce the suspension or divestment of their Russian operations, but those firms that are alleged to be more socially responsible were neither quicker, nor more likely, to announce such actions. Third, we find that, from an investor perspective, both the materiality of firms’ Russian exposure and the extent of disclosure about such exposure negatively impacted returns after the outbreak of the war, while investing in more highly-rated ESG firms did not offer any protection. Our results indicate that investing in highly-rated ESG firms may be an exercise in futility as such firms are neither more likely to exert socially responsible behaviors abroad, nor are their shareholders better protected against the stock market fallout after an important geopolitical shock. Our results are robust to using data from 7 different ratings providers, as well as to using each of social and human rights scores.

Keywords: ESG, Corporate Social Responsibility, CSR, Sustainability, Sustainable Investment, Russia, Ukraine

JEL Classification: F51, F60, G11, G15, G32, M14, M41