ESG Investing During Calm and Crisis: Implied Expected Returns

Abstract

We examine the impact of ESG performance on option-implied expected returns. For a sample of S&P500 constituents over January 2007 to December 2021, we find that stocks with higher ESG scores have lower expected returns, but only during the Global Financial Crisis and the COVID-19 pandemic. We also find evidence of a positive, steeper ESG risk premium term structure during these crises, suggesting that investors expect a reversion to normal times within a year. Our results support the view that ESG investing reduces downside risk during crises, but contrast with the popular opinion that ESG investing increases expected stock returns over long periods.

Keywords: ESG, option-implied expected return, crisis, trust, GFC, COVID-19

JEL Classification: G11,G12