The Performance of Socially Responsible Indices in Market Downturns : Evidence from the financial crisis of 2008 and the COVID-19 Pandemic

In the spring of 2020, S&P500 experienced the biggest crash in its history due to Covid-19 and the turmoil following the safety measures to stop the spread of the virus. After the long bull market following the financial crisis and ending at the corona crisis investors' focus shifted to- ward assets with smaller downside risk. While responsible investments have long been seen and marketed as such assets, the matter still lacks consensus. Their possible alphas could be driven by a social phenomenon or the fact that responsible investments tend to have lower volatilities and thus win in bear markets but lose in bull markets. The purpose of this study is to research, if socially responsible indices (MSCI USA SRI & MSCI USA ESG) outperformed S&P500 overall, during covid-19 or the last financial crisis, and to further answer if these indices could be safe-haven assets during market turmoil. The alphas for the indices are calculated with the capital asset pricing model and Fama & French three-factor model. An event study is further conducted on the crash of S&P500, to capture the effects during the crash. The study does not find significant alphas on either index during the entire sample period, finan- cial crisis or Covid-19 crisis. Neither did the two indices yield significant abnormal returns during the crash period of spring 2020. Thus, the empiric part suggests that responsible indices did not outperform S&P 500 in times of crisis or overall. There are two explanations for the results. First, the indices are not different enough from S&P500. Their composition is just too similar for the possible differences to be significant. Sec- ond, responsible investments may be performing as well as traditional investments. Further re- search on the topic is still needed. Possible future topics include emerging markets and fixed income assets.