ESG and company performance during Covid-19 pandemic (9.9.2022)

Text: Jaana Reijonen, ESG enthusiastic & Reporting specialist

ESG and company performance during Covid-19 pandemic – What could investors learn from the relationship?

ESG investing has become more and more common, and ESG factors are now probably an integrated part of most of the investors’ investment decisions. In fact, Reuters and Bloomberg reported that in 2021 ESG investing was at a record high level.

In my master’s thesis I assessed the impact of ESG factors for company performance during the pandemic. In addition to that, I researched how companies’ ownership structure (in this case proportion of institutional investors in a company) and geographical location have affected the ESG – company performance relationship. Besides, I investigated the possible impact of ESG on company valuation, and whether the importance of ESG factors has been highlighted during the Covid-19 pandemic compared to the time before pandemic. Next, I will present some of the main research findings from my thesis by describing five key implication possibilities or lessons learned from investors’ point of view.

Lesson 1 – There has been a positive relationship between ESG performance and company performance as well as company valuations during Covid-19 pandemic. This finding speaks for the importance of taking ESG aspects into account when making investment decisions and indicates that sustainable companies would outperform their less sustainable counterparts. It also seems that good ESG performance has been valued by the investors at the market and that ESG is an important value creation factor.

Lesson 2 - Nevertheless, the positive impact of ESG factors on company performance becomes visible especially on the long run. This indicates that investors should apply a long-term investment horizon in ESG investing and that possible investment returns are to be expected in long rather than short run.

Lesson 3 - Institutional investors have reinforced the positive relationship between ESG and company performance. Thus, the presence of institutional investors in a company may be a good sign from an ESG investor’s point of view. For institutional investors this indicates that they have relatively lot of power to impact their investment companies’ ESG performance.

Lesson 4 – However, the marginal effect of institutional investors has not been significant. In other words, it seems that already relatively low presence of institutional investors positively affects the ESG – company performance relationship. Thus, from institutional investors’ point of view it looks like that not only do they have quite a lot of power to impact investment companies’ ESG aspects, but they also have used that power quite effectively.

Lesson 5 - ESG performance has been better reflected to company performance in the US than in Europe during the pandemic. Even though this is a bit surprising result, the finding highlights the importance of taking geographical aspects in ESG investing into account. Things to consider include for instance, evolving regulation, differing stakeholder expectations and varying maturity level of ESG between regions.