2008’s mistrust VS 2020’s panic: Can ESG hold your Institutional Investors?

It is tempting to compare two crises and the 2008 Great Recession seemed the closest example to turn to during the ongoing pandemic. It was trust that failed in 2008 and panic of the unknown that hit in 2020. In this paper, we compare the two market collapse incidents, focusing on their role as turning points for ESG considerations among investors that do not traditionally belong to the SRI investor class. We draw from the signaling theory to form the hypothesis that ESG performance acts as a buffer to retain institutional shareholders under heavy stress conditions and through poor performance. Focusing on investment funds as rational actors of the financial markets, we view ESG performance as a risk hedging mechanism and an indication of higher resilience, under the good management theory, for corporations. We study the hardest-hit sectors and run a difference-in-differences analysis for listed constituents in the USA and Europe, confirming the adjustment of risk valuations performed by funds on the basis of ESG extra-financial information and individual social, environmental and governance scores for both crises. Ultimately, we highlight a varying pattern of dynamics for the three underlying areas of ESG risks.