Non-financial Rating and Socially Responsible Investment Reaction to Financial Turmoil

Abstract

The academic debate regarding the ability of socially responsible investments (SRIs) to outperform traditional investments has not yet concluded. SRIs’ outperformance (or underperformance) seams driven by many factors, such as the specificity of markets, timing, and types of investments (Wu et al., Manag Decis Econ 38:238–251, 2017; Revelli and Viviani, Bus Ethics Eur Rev 24(2):158–185, 2015). The aim of this chapter is thus to contribute to the academic debate investigating whether the Environmental, Social, and Governance (ESG) rating can be a proxy of companies resilient during financial turmoil. The methodology applied is the event study. The considered events are the recent Brexit announcement and the bankruptcy of Lehman Brothers. The SRI sample consists of 250 European socially responsible companies, while ESG ratings are from the Thomson Reuters ESG rating. This study contributes to the literature by showing that higher ESG ratings can be an expression of more resilient companies, especially during severe financial shocks. This finding is also useful for practitioners involved in portfolio investment selection.