Do ESG investments mitigate risk during financial crisis : evidence from Europe

Abstract

This thesis uses a panel dataset of 185 European firms from 2000 to 2023, to check if Environment, Social and Governance (ESG) investment improves financial stability and firm performance at the time of economic crisis. Financial stability, as indicated by the Altman Z-score, and the firm’s performance, as determined by the return on assets, are the two main outcomes of the study. Several panel regression models are used to assess the possible risk-mitigating function of ESG, both overall ESG scores and individual pillars of Environment, Social and Governance. Along with controlling firm-level variables such as profitability, and size (logging of market capitalization), the analysis also takes systemic events such as Global Financial Crisis of 2007–2008, COVID-19 pandemic, and implementation of Paris Agreement.

The conclusions suggest that although ESG factors did not have a strong relationship with financial stability in the past, they have become more relevant recently, especially after 2015. During the COVID-19 pandemic, companies with high ESG scores performed better and had some more financial flexibility, however, the results during the Global Financial Crisis were less pronounced. While environmental metrics vary more than the other two pillars, governance and social factors continuously contribute to stability and performance. The results point to a growing, although still negligible, corporate flexibility and relationship between ESG engagement, with important regional variations throughout Europe.

Although ESG is not yet a reliable indicator of financial stability, its effect is increasing, especially when it comes to long-term risk awareness and sustainable strategies. Limitations like possible endogeneity and deviations in ESG scoring methodologies underline the need for cautious interpretation and additional study.