ESG screening strategies and portfolio performance: how do they fare in periods of financial distress?

This paper analyses the impact of screening strategies based on ESG (Environmental, Social, Governance) scores, with a focus on periods of financial distress such as the 2008 global recession and the 2020 Covid-19 pandemic. To this end, negative and positive screening strategies based on Bloomberg ESG disclosure scores and different screening thresholds are set up from the 559 stocks belonging to the EURO STOXX index in the period 2007-2021. To compare ESG portfolios performance with a benchmark passive strategy, we compute risk-adjusted performance measures: the Sharpe ratio and the alphas resulting from both a one-factor model and the Carhart four-factor model. Three main results emerge. First, each single ESG dimension has a different role in determining performance: environmental and governance screens, and the combined ESG ones, generally lead to over performance, in contrast to the social screens. Second, ESG screens represent better performing strategies in the long-term, whereas, when the focus is on times of financial distress, the passive strategy appears to perform better and ESG portfolios do not seem to represent a safe haven. Finally, positive screening strategies, and in particular those based on the social dimension, limit diversification benefits and are characterized by significant underperformance during periods of crises. These results are useful to address ESG portfolio optimization and to gauge the role that finance may have in support of sustainable economic development.