Impact of COVID-19 on ESG risk, stock returns, and firm performance: Evidence from Japanese firms

Abstract This study examines the impact of environmental, social, and governance (ESG) performance on stock returns and firm performance with the interaction effect of COVID-19, focusing on businesses with low ESG performance. We applied difference-in-differences regression to evaluate how these indicators changed after COVID-19, studying 7,868 samples of 882 firms from June 2016 to March 2021. Our analysis revealed that the impact of ESG risk on long-term firm valuation, represented by Tobin’s Q, shifted in the years after COVID-19. We also found that there was a change in the magnitude of ESG risk, especially the impact of high ESG risk on sales as well as return on equity, before and after the COVID-19 pandemic. In the post-COVID-19 climate, our study suggests that managers should place greater emphasis on ESG efforts, which allow businesses to keep consumers and investors engaged and financially secure, even during unanticipated external shocks. More proactive sharing of information on a company’s ESG operations will be essential, particularly for consumers and investors who may be influenced by the signaling effects of ESG ratings.