The Resiliency of Environmental and Social Stocks during the COVID-19 Market Crash

  • Rui Albuquerque
  • 1 September 2020

The COVID-19 pandemic and the stock market crash that followed presents a good setting to understand and quantify the value of CSR policies.

In the U.S. and around the world, stock markets fell precipitously in the first quarter of 2020 due to the COVID-19 pandemic. But the market reflects the aggregate behaviour of heterogenous firms and it is worthwhile asking what firm characteristics helped firms achieve a softer landing.

Since the crisis lead to a collapse of demand, with the exception perhaps of demand for essential goods, it is natural that firms positioned to endure a short-run shortage of liquidity would do relatively better. It is, in fact, reassuring that the market responded positively to firms with high cash and low debt as has been demonstrated.

The pandemic and the stock market crash that followed also presented a test to the usefulness of years of investments in corporate social responsibility. Many companies pursue CSR policies as a product differentiation strategy. The successful companies doing so have been able to align their CSR strategies with their long-run growth strategies and use CSR to captivate a market. Examples include Patagonia that supports conservation through its use of organic cotton, Apple that is moving entirely into renewable energy, or Levi Strauss & Co in its efforts to use less water in manufacturing their clothes. Customers that care about these aspects of the environment or of society connect to the company and to its product. What is good for the environment, is also good for the company’s customers, and to close the circle, is good for the company itself. In past research, several people, including myself, have shown the benefits of this increased customer loyalty through higher profit margins and lower systematic risk. In the context of the COVID-19 related stock market crash, I find (with Professors and Yrjo Koskinen and Chendi Zhang, and PhD student Shuai Yang) that firms with high levels of CSR did relatively better displaying returns that were 7.2% higher than other firms in the first quarter of 2020.

Besides aligning their CSR strategies with customer preferences, companies also align their CSR strategies with investor preferences, another major corporate stakeholder. Research has shown that socially responsible investors (SRI) are more resilient compared to other investors. It would be expectable then that in a market tempest these investors would not sell out their portfolio companies as aggressively as other investors would for their own portfolio companies. Interestingly, my co-authors and I find that while there is some evidence of SRI investor resilience during the COVID-19 pandemic crash, it is significantly weaker than the effect that customer resilience had on stock returns.

Corporate social responsibility is not a panacea, and like everything companies do it must have a purpose, be aligned to their long-term strategies, and make sense financially. The COVID-19 pandemic and the stock market crash that followed presents a good setting to understand and quantify the value of CSR policies. My research suggests that engaging in CSR as a way to build customer resiliency can help companies build stock market resilience.


Note: This article is based on the research paper “Resiliency of environmental and social stocks: an analysis of the exogenous COVID- 19 market crash,” by Rui Albuquerque, Yrjo Koskinen, Shuai Yang, and Chendi Zhang, that has been accepted for publication at The Review of Corporate Finance Studies.

  • Rui Albuquerque
  • Professor of Finance and Seidner Family Faculty Fellow at the Boston College Carroll School of Management