Exploring the relationship between ESG and portfolio performance during times of crisis : a study of the Russia-Ukraine war

Abstract: This thesis explores the relationship between Environmental, Social, and Governance (ESG) ratings and portfolio performance in terms of risk-adjusted returns and volatility during times of crisis. A sample of 761 European public companies with a market capitalisation of at least 300 million euros are divided into high and low ESG portfolios based on their ratings. The high ESG portfolio consists of companies with ratings in the top 20% (fifth quintile) and the low ESG portfolio consists of companies with ratings in the bottom 20% (first quintile). Both portfolios are rebalanced annually throughout the study period. The study finds that both portfolios, especially the low ESG portfolio, outperform the market, in terms of excess returns as well as risk-adjusted returns during the Russia-Ukraine war. Additionally, the study finds that the low ESG portfolio has the lowest risk during the war period. However, the results lack statistical significance. To ensure the robustness of the results, a separate test is conducted studying the COVID-19 instead of the Russia-Ukraine War. The robustness test reveals that both portfolios generated abnormal risk-adjusted returns during the COVID-19 period, in contrast with the original study’s findings. However, the explanatory power of the models is limited.