The Value of Being Responsible in a Crisis: An Analysis of the European Market

In the Subprime Crisis of 2008/9, European firms with high Corporate Social Responsibility (CSR) scores had stock returns 1.8 to 2.6 percentage points higher than those with lower scores. This is believed to be the effect of social capital – an asset which becomes incrementally valuable during crises of trust. However, during the subsequent Sovereign Debt Crisis in 2011, we find the opposite to hold true. European firms with high CSR scores had stock returns which were roughly 1.6 percentage points lower than the returns of low CSR firms. We observe that the drastic change in the market response to CSR scores may be the result of the scores becoming a proxy for ESG “controversies” which could lead to legal disputes and fines. We find that using a new measure of social responsibility based on firms’ efforts to avoid controversies surrounding sustainability and conduct issues eliminates the return penalty previously observed with raw CSR scores. We conclude that European market participants have not ceased to value social capital in their investment decision making following the Subprime Crisis. Rather, in considering ESG measures beyond raw CSR scores, they have become shrewder in assessing true firm commitment to investment in social capital and are managing their portfolios accordingly.