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ESG scores and financial returns during COVID-19


written by Gianluca Guidi & Shanshan Zhu

Our new study – focusing on the US companies included in the S&P 500 index – aims to investigate the relationship between S&P 500 companies’ financial returns and FinScience Alternative ESG scores during COVID-19 pandemic. In particular, we investigated how the stock returns of these companies have evolved over the past 10 months, from January to October 2020.

For the ESG data, we employed our FinScience Alternative ESG scores [see Finscience Alternative ESG scores Methodology] that are based on more than 400 SDG-related indicators retrieved from both traditional and ‘alternative’ data sources.

FinScience Alternative ESG Score consists of two overall ESG scores:

  1. the ESG Internal Score, which measures the company’s ESG performance based on corporate self-reported and disclosed data.
  2. the ESG External Score, which measures the company’s ESG ‘perceived’ performance based on alternative external stakeholder-generated data, in order to provide an on-time evaluation of the company’s sustainability impact and conduct.

The integration of corporate self-disclosed data with the analysis of great amounts of external Alternative Data – by adopting an AI-based approach – provides a more complete view of which are the corporate opportunities/risks in terms of performance associated to specific strategies and activities, and enables the cross-checking of information by comparing different and independent sources of information.

FinScience Alternative ESG Score and financial performance

Based on our analysis, FinScience Alternative ESG score, in general, appears to be negatively correlated to financial performance. This implies that, on average, companies with higher ESG scores experienced lower returns, which confirms the results of the majority of previous studies conducted on the U.S. market.

Figure 1 shows the average returns for the 10 best and worst performers according to FinScience Alternative ESG score, respectively accounting for the final ESG score, and the single E, S and G factors, from January to October 2020.

Figure 1: Final ESG scores vs single ESG scores best and worst 10 performers’ returns.

The results show that while there is no relevant relationship between financial returns and FinScience Alternative ESG score, it could not be said the same if we analyze the three E, S and G factors separately. There is in fact a significant loss faced by companies that low-performed on the E factor (-20%), and a neutral result for those performing well on the same factor. In relation to S and G factors, the opposite trend could be observed, i.e. the market seems not to award companies performing well on S and G scores.

FinScience Alternative ESG Score and SDGs

In order to have a deeper understanding of what lies behind Environmental, Social and Governance factors, we also went through the analysis of the scores we obtained for each of the UN 17 SDGs to see which aspects of the ESG matters and weigh the most in relation to financial market returns, and how they relate.

Figure 2 above highlights the most interesting SDGs in terms of financial returns. We can identify two groups:

  • SDGs where best scorers financially perform worse than worst scorers (SDGs 1, 3, 4, 5, 8, 10, 11, 13, 15, 17);
  • SDGs where best scorers financially perform better than worst scorers (SDGs 2, 6, 7, 9, 12, 14, 16).

Amongst all, the SDGs that captured our attention are 3, 5, 8, 17 (namely good health and well being, gender equality, decent work and economic growth, partnership for the goals) for the first group, and 7, 12, 14, 16 (namely affordable and clean energy, responsible consumption and production, life below water, peace justice and strong institutions) for the second one- where it occurs at least a significant gap between the best and worst scorers’ returns.

We can therefore confirm that the company’s scores on some of the SDGs that are more related to the Governance and Social spheres (all 3, 5, 8, 17 goals are either part of S or G, or both) are generally inversely related to company’s returns. Similarly, some of the SDGs of the second group (6, 7, 12, 14, 16) happen to be more related to the Environmental sphere and directly related to financial returns.

Internal vs External Scores and comparison with other score providers

As FinScience Alternative ESG scoring system allows the analysis of both internal (related to company communication) and external (related to public perception) corporate sustainability performances, we analyzed the relationship between internal/external ESG score and financial performance.


Figure 3: 10 best and worst, internal and external scorers’ returns

Figure 3 shows the 10 best and 10 worst performers according to internal and external scores respectively, as well as their financial performance. FinScience Alternative External score (related to public perception) seems to play an important role for companies’ returns as the market tends to award (penalise) companies that perform well (bad) on this score.

Comparing both Finscience Final Score and External Score to other ESG scores providers, it is clear that it is the External scores that brings a significant added value: it is in fact able to capture the real perception of the market on the stocks, seeing its best and worst performers reversing the trends observed from all providers (including Finscience Final Score). Figure 4 portrays the returns of the 10 best and worst companies according to FinScience and other leading sustainable scoring system providers. It stands out how Finscience’ both worst and best ESG scorers are those which perform better compared to the best and worst performers according to other scoring systems. Nevertheless, the trend observed is the same across all the four providers: the worst 10 ESG score performers always outperform the best 10. If however, if we perform the comparison between other ESG scores’ providers only to Finscience Alternative External Score, we can notice a reverse situation: Figure 14 highlights how the Finscience External Score seems to more coherently reflect stock market reactions.

Figure 4: Comparison between Finscience’s ESG score, Fincience’s External scores’ and other providers’ best and worst companies returns

Analysis by sectors

Figure 5 below portrays the differences between best 10 and worst 10 ESG performers’ average returns, per industry, and therefore it helps to identify the sectors where apparently different ESG scores may have had an impact.

The most interesting sectors standing out from the two figures above are the followings:

  • Information technology, that shows positive returns for both best and worst ESG performers, with the tendency of performing better returns (more than 20%) when performing worse ESG scores,
  • Energy, that has been hit by huge losses (-80%) for both best and worst ESG performers, and where, again, best ESG scores were associated with worse financial performance.
  • Consumer discretionary, communication and industrials, where we could notice positive returns for worst ESG scorers, and negative returns for best ESG scorers.

Financials and Consumer Staples sectors, that are the only sectors significantly reversing the trend, observing better (with almost a 20% gap) returns associated with better ESG scores.

Figure 5: Difference between average best 10 ESG performers per sector and average worst 10

COVID-19 Pandemic

At last, by dividing the timeline into two time windows, centring the COVID-19 impact in the US on mid March, and therefore observing the January-March and April-June returns, we could investigate the relationship between Covid pandemic and Alternative ESG Scores.

Figure 6: 10 best and worst final score performers’ returns

In Figure 6, which shows the returns of best and worst 10 companies according to their final ESG score, it could be noticed that companies with lower ESG scores proved to be more resilient in relation to COVID-19 pandemic.

This might be due to the fact that gaining and maintaining high ESG scores can be costly (i.e. sustainable reports, assurances, certifications etc.) and non-essential to the normal and ordinary functioning of many companies. Therefore, during a pandemic, “essential” investments and expenses are normally prioritized in order to cope with the crises and to avoid cutting costs by resorting to layoffs and other drastic activities.

Given the interesting outcome of the “Internal vs External” scores analysis previously treated, Figure 7 below aims to compare the 10 best and 10 worst companies according to their internal and external scores, in both January – March and April – June periods. From such Figure it is clear that FinScience External Score helps to forecast financial returns more significantly. First of all, the gap of returns between the best and worst 10 external scorers equals to almost 10% (in favour of best performers), contrary to the tiny 2% gap for the best and worst 10 internal scorers. Moreover, if we look for a correlation, the analysis points out that performing well (bad) in external scores lead to better (worse) financial performances, and exactly the contrary happens for what concerns the internal score, albeit for a much smaller gap between the returns (1-2%), as stated above.

Figure 7: 10 best and worst, internal and external score performers’ returns


The study confirms, as found by previous studies Renneboog et al. (2008); Geczy et al. (2005), that US stocks with a high score on ESG issues are not generally rewarded by investors. Indeed, ESG in the US has proven to be more of a risk for extraordinary events (scandals, environmental catastrophes etc.) than an opportunity Karpoff et al., 2005; Capelle-Blancard and Laguna, 2010; Karpoff and Lott, 1993; Chaney and Philipich, 2002.

An explanation for this might be that high ESG scores are frequently associated with high costs in terms of reporting, assurance activities, certifications and sustainable investments, which could be not considered positively by investors seeking for financial returns in the short-term. This could be even more true in a situation of crisis, such as the one we are still living.

However, if this is true at the moment, we might expect that in the near-future, with the recent election of the new US president Joe Biden, corporate ESG performance will be strongly integrated in investors’ decision-making – as, just to give an example – Biden’s climate and environmental justice plan will lay out almost US$2 trillion in the next ten years, and he expressly declared its aim to rejoin the Paris agreement.

Notwithstanding the general tendency for a negative relationship between ESG scores and financial returns, it should be highlighted that Finscience’ best ESG scorers financially performed better compared to other ESG scores. More importantly, we could notice how news and stakeholder-generated data impact companies’ financial returns, as the market tended to award (penalise) companies that perform well (bad) on FinScience Alternative External Score. Consequently, it is clear that FinScience External Score is the best solution in order to capture the trend of the market compared to all the ESG scores analysed in the study as, unlike the other scores – that are generally more static and are usually based on traditional sources of information – it promptly captures changes in market trends, and integrates public sentiment and perception in relation to corporate day by day operations. The full whitepaper. Read it here.