Returns behavior of ESG ETFs in the COVID‐19 market crash: Are green funds more resilient?

Abstract

This study explores the importance of environmental, social, and governance (ESG) performance in explaining the returns and volatility of returns of exchange‐traded funds (ETFs) during the market crash induced by the COVID‐19 pandemic. The study uses an unbalanced panel of monthly data during the period 2005–2021 for a diversified sample of 160 iShares Morgan Stanley Capital International conventional and ESG/socially responsible investment (SRI) equity funds. To obtain robust results, a variety of analyses are conducted, including multiple panel regressions based on one‐way clustering, standard error estimates obtained from different covariance matrix estimators that are heteroskedasticity and autocorrelation consistent, simultaneous quantile and inter‐quantile regressions, weighted least square regressions with alternative weights for the regression coefficients, and tests of coefficient equality with bootstrapped standard error of difference in subsample regressions. All the sensitivity analyses give similar results, confirming their validity. The results provide strong evidence for the resilience of sustainable funds during the crash, with ETF returns showing persistence during the market downturn. This study suggests that ESG/SRI investments may help ETFs to outperform their counterparts, indicates that sustainability investments matter in times of crisis, and implies the adoption of strategies that promote sustainable investment development.