key: cord-0858309-hrosm7hk
authors: El Khoury, Rim; Nasrallah, Nohade; Harb, Etienne; Hussainey, Khaled
title: Exploring the performance of responsible companies in G20 during the COVID-19 outbreak
date: 2022-04-15
journal: J Clean Prod
DOI: 10.1016/j.jclepro.2022.131693
sha: 2686f39fe1a5f24489f7a1956e89c37fc706a69b
doc_id: 858309
cord_uid: hrosm7hk

An uphill question of whether Environmental, Social, and Governance (ESG) directly impact firms' financial performance (FP) continues to vacillate between two opponent streams. In the present study, we argue that COVID-19 is an extreme event where the effect of ESG sharply manifests. We rely on cross-sectional data in the context of G20 countries for the year 2020. To avoid biased results due to governments support, we integrate four novel metrics provided by the Oxford Coronavirus Government Response Tracker (OxCGRT). We run sequential regressions (OLS; and quartiles to account for the Ingrained Income Bias (IIB) and ESG scores). We also perform robustness tests and account for the interaction between ESG and cash level. Our models were subsequently replicated for each ESG pillar. Findings indicate that ESG is beneficial during COVID-19, but the reward appears to be closely tied up to specific aspects of ESG, income level, and firm-specific variables. Results contribute to the burgeoning literature on ESG during COVID-19 by reflecting on firms’ key attributes and the preponderance of government support.

The emphasis on Environmental, Social, and Governance (ESG) is not a trend as some claim; rather, it is demand-based and emerges as a priority goal for a company's senior leadership 1 . ESG is a term commonly used to evaluate a company's non-financial performance indicators in three areas: environmental, social, and governance. Environmental area refers to the company's behavior toward the environment in terms of resource use, emissions, and innovation. In contrast, the social area considers the company's relationship with workspace, suppliers, customers, and the communities. Finally, the governance area examines its management, shareholders' rights, and CSR strategy. These three broad areas are often used by conscious investors to screen potential investments and are important measures for company valuation and risk management. A rising stream of ESG pros and cons is drifted by skeptical and illusionary findings that raise concerns and inquietude. Whether ESG has a placebo effect and can shield investors in times of severe crisis such as the COVID-19 outbreak remains arguably incontestable. Recently, Demers et al. (2021) stress that ESG is not an equity vaccine during the COVID-19 crisis. On the contrary, they claim that companies' performance resides in accounting-based measures that reflect key internal qualitative and quantitative traits, industry affiliation, and traditional market-based measures. More critics point out that ESG scores are an outdated blunt aggregation. Aswath Damodaran, an NYU finance professor, described ESG as "a mistake that will cost companies and investors money while making the world worse off" and states that "it creates more harm than good for society". It is a "placebo" that allows people to avoid grappling with difficult environmental and social challenges 2 .

Irrefutably, the other side of the debate shows ESG legitimacy whereby commendable efforts were dedicated to aligning and harmonizing its differing standards. The large-scale initiatives conducted and steered by standard-setters reflect the importance of the subject. For instance, the International Financial Reporting Standards (IFRS) Foundation proposed to set up an international sustainability standards board that would operate alongside the International Accounting Standards Board 3 . Recently, the Securities and Exchange Commission (SEC) has also formed a Climate and ESG Task Force to identify misconduct in ESG reporting. Alongside, the Sustainability Accounting Standards Board, the International Integrated Reporting Council, the Global Reporting Initiative, the Climate Disclosure Standards Board, and the Carbon Disclosure Project foster the integration of new regulations and strive to implement the existing ones.

Theoretically, the predominant view of socially responsible firms proclaims that the main driver of ESG activities is to maximize shareholder welfare (e.g., McWilliams & Siegel, 2001) , while the opposite view claims that managers purvey ESG reports to generate benefits at the expense of shareholders. Thus, a central research question stems from the contemporary uphill debate "does it pay to be good?"

Though ESG adoption is still in its early innings, its effects seem to be more pronounced in times of severe crises. Coupled with steep economic and social downturns, the speed and exogenous nature of COVID-19 shock tantalize contrast and ambiguity. This crisis caused an unpredictable public health shock that has inflicted the global economy (the global gross domestic product declined by 6.7 percent in 2020 4 ), but the ubiquitous nature of the 2008 global financial crisis (GFC) infers some resemblance. As such, firms' sustainability surges as a hot research question. Can ESG stand as a buffer shock for social and vigilant firms? What are the important lessons to learn from such a crisis that hardly dislocated the whole planet?

What are the main factors that drive businesses to sustain? And do they bear common traits with ESG disclosure?

Relevant to the above discussion, uncertainty and contradiction inhibit the empirical investigation of the ESG topic. When tested relative to performance, findings diverge at different levels: country, industry, capital markets, law enforcement, governance, and reporting requirements. Some researchers argue that this divergence may be due to the problem of confounding or omitted variable bias that can largely and unfavorably affect results. Further key analyses gauge ESG score and tally performance to its magnitude.

Others attempt to set a clear analogy between the pandemic and GFC. and Cornett, Erhemjamts, & Tehranian (2016) find clear evidence about the positive effect of ESG practice on firm performance (FP) during GFC. Notwithstanding the results are currently limited to market performance within specific areas and geographical contexts (Albuquerque et al., 2020; Broadstock et al., 2021; Ding et al., 2021; Folger-Laronde et al., 2020; Lee & Lu, 2021) , the pandemic is pushing forward the research on the role of ESG in a financial distress context.

In the present paper, we pay particular attention to specificities such as the country effect, country income level, industry, and other interesting dimensions. Hence, we extend our analysis to cover G20 countries. We include firms from different industries conditional on ESG and financial data availability.

First, the baseline analysis integrates the whole sample, and at a later stage, we account for the Ingrained Income Bias (IIB) to divide the sample into developed and developing countries. Moreover, to cope with the existing hurdle of performance, we support our choice for ESG disclosure based on three important facts: (1) the global economy shift towards more services and knowledge industry that encompasses intellectual capital, intellectual property, and intangible assets that are hard to measure; (2) the evolution of corporate value and current accounting systems that contribute to improving financial and non-financial 4 https://www.statista.com/statistics/1240594/gdp-loss-covid-19-economy/#statisticContainer J o u r n a l P r e -p r o o f 4 disclosure, including material ESG risk and opportunities that uniquely affect each sector and industry; (3) the intersection between ESG and inherently embedded assets and the efforts to ensure their sustainability.

On another note, we argue that the COVID-19 pandemic presents an incomparable shock as it presents a severe disruption whose entrenched effects have aggregately affected the global economy. In response, many governments promptly reacted to support the business sector and provided funds and debt reliefs and extensions. Thus, to avoid bias caused by governments' deployed efforts and isolate the benefits of ESG, we consider four novel metrics provided by the Oxford Coronavirus Government Response Tracker (OxCGRT) 5 : the overall Government Response Index (GI), the Stringency Index (SI), the Economic Support Index (EI) and the Containment Health Index (CHI).

We also dissect ESG to test whether there are asymmetries in the relationship between each of the three pillars and FP. We also split firms into quartiles based on their ESG scores and perform several robustness tests to confirm our results.

In addition to contributing to the recent literature on the impact of COVID-19 on market and accounting performance measures (Al-Awadhi et al., 2020) , the benefits of the study manifest in the following areas: First, we evaluate the financial performance of sustainable investments in times of exceptional crisis from a worldwide health emergency and by controlling for the measures put in place by governments to preserve global health. Second, few studies have analyzed the link during market downturns. Third, we disaggregate ESG scores and resonate on the different behaviors of the three pillars in the particular context of the COVID-19 crisis. Fourth, we include several control variables to see whether the impact of ESG on FP is conditional on a firm's financial health (size, leverage, cash holding, growth opportunities). Fifth, we differentiate ourselves by controlling for novel metrics measuring the governments' response to COVID-19, namely the above-mentioned indices, GI, SI, EI, and CHI.

The rest of the paper is organized as follows. The relevant literature and hypotheses are presented in Section 2, while the methodology and key variables used are described in Section 3. The empirical results and robustness test results are reported in Section 4. Finally, section 5 concludes with the summary, main implications, and recommendations.

Whether or not ESG helps alleviate crisis gravity remains one of the hottest contemporary debates.

Theoretical and empirical analyses were conducted in different countries, contexts, frameworks, vis-à-vis pre-and post-integrated reporting (Albitar et al., 2020) , and voluntary disclosures ( Wang & Hussainey, 2013) . Previous crises were heavily investigated upon which a myriad of explicative scenarios was drafted.

Yet, the analogy between the pandemic and other crises is sometimes rudimentary. Still, further exploration of some invisible variables and unknown metrics is essential. Supposedly, investments in corporate social responsibility are drivers for agility and proactivity in times of constraints .

As companies are the economy's blood-irrigators, they become aware of the importance of setting strategic goals and plans to shield against potential exogenous and endogenous shocks. Big conglomerates strive to conserve their image and reputation in a belief that such inherent and qualitative characteristics are the baseline for their survival and existence. This implores building a strong relationship with all stakeholders as ESG activities strengthen trust and loyalty and hence reduce susceptibility to economic downturns.

In parallel, the accounting systems appear insufficiently vague to convey a clear and complete picture of the whole performance. With time, governments, policymakers, and standard setters reflect on the imminent utility to conjugate the financial reports with non-financial metrics (Nasrallah & El Khoury, 2020) to signal companies' ESG behaviors. An uphill question vacillates between three main concerns: ESG scores validity (Gyönyörová et al., 2021) , financial performance sufficiency, and corporate internal weaknesses (Cheema-Fox et al., 2021) . Do ESG metrics truly reflect the other hidden parts not reflected through financial reports? The pandemic soars as an extreme-case scenario to test the ESG effect on companies' performance.

Theoretically, there are two conflicting hypotheses: The social impact hypothesis (a positive relationship) and the trade-off hypothesis (a negative relationship). In this sense, ESG has an intrinsic value as it converges with the social impact and the stakeholder theories ( Freeman, 1984) . It is seen as a source of competitive advantage where corporations have a duty to society (Carroll, 1999) . Long-term core strategies espoused agents' interests and stakeholders' benefits, including employees, consumers, banks, governments, and locals (Su & Baird, 2017) . On the contrary, the neoclassical theory of Friedman (1962) concentrated on profit maximization and value creation for owners and managers. Pros of the latter theory reported that satisfying other stakeholder groups might negatively impact firm performance (Stuebs & Sun, 2015) . On the other side, according to the trade-off hypothesis or traditionalist view, there is a negative relationship between ESG and FP. Spending resources to accomplish social and environmental goals (such as investment in pollution reduction, higher employee wages and benefits, donations, and sponsorships for the community) increases costs, harms profitability, and impairs competitive advantage (Galant & Cadez, 2017) .

Empirically, many studies explore the relationship between ESG disclosure and FP. Some of them report positive, negative, and neutral impacts, while others identified U-shaped or inverted U-shaped relationships. The positive relationship suggests that being socially responsible improves profitability (Harun et al., 2020; Fatemi et al., 2015; Malik et al., 2015) , while the negative relationship J o u r n a l P r e -p r o o f 6 supports the trade-off theory stating that ESG inflates costs (Lyon & Montgomery, 2013; T. Wang & Bansal, 2012) . The neutral relationship suggests that being socially responsible does not affect profitability (Gilley & Rasheed, 2000; Surroca et al., 2010) as positive and negative effects are offset. For instance, Broadstock et al. (2021) find that high-ESG portfolios generally outperform low-ESG portfolios within China's CSI300 constituents, suggesting that ESG mitigates financial risk during the pandemic. Ding et al. (2020) support the positive link using a global sample of over 6,000 companies in 56 economies stating that firms with higher pre-pandemic CSR investments experienced better stock price performance during the pandemic. Moreover, Albuquerque et al. (2020) find that firms with higher environmental and social performance had higher returns and lower volatility during the pandemic. Lee & Lu (2021) suggest that Taiwanese CSR companies were less affected by the pandemic. However, Demers et al. (2021) support the irrelevance of ESG scores in determining stock returns during the pandemic.

Thus, we formulate our first hypothesis as follows:

Hypothesis 1 (H1): ESG performance positively contributes to companies' performance during

Properly said, one of the major drawbacks of previous studies on ESG-FP demarcates from the noninclusion of the country's income effect. In this context, the standard growth theory predicts that poorer countries tend to grow faster and "catch up" to rich countries. Yet, the debate over this theory or what economists call the convergence hypothesis has a long history whereby policymakers have become preoccupied with the notion "stuck in a middle-income trap." 6 On the contrary, Johnson & Papageorgiou (2020) find little evidence that the poorest economies are catching up to their wealthiest peers. There is a lack of progress in closing the gap between countries as most low-income countries could not sustain or spur growth as supposedly anticipated based on the traditional standard economic theory.

Based on the World Bank Report, about 90 percent of sovereign ESG scores can be explained by a country's national income (Pesme & Caputo Silva, 2021) . There exists an Ingrained Income Bias (IIB) in the ESG investigation. Higher-income countries tend to have stronger institutions and less inequality. This drives ESG scores higher and pushes to inevitably allocate more funds toward richer countries. The magnitude is highly centered in countries' frameworks (Pesme & Caputo Silva, 2021) . In developed and emerging markets, Singhania & Saini (2021) find that ESG practices heavily depend on country voluntary or mandatory codes, sustainability reporting and integrated reporting, and environmental commitment.

This would lead to the establishment of resilient business operations and reporting practices. Garcia et al. (2017) document that BRICS companies in sensitive industries present superior environmental 6 https://documents1.worldbank.org/curated/en/965511468194956837/pdf/104230-BRI-Policy-1.pdf J o u r n a l P r e -p r o o f 7 performance. Iamandi et al. (2019) find that the ESG approach of the European reporting companies is mainly mature, strategic, and long-term oriented. It contributes to increasing corporate competitiveness and supporting societal well-being altogether.

Within the pandemic context, Gianfrate et al. (2021) examine a sample of more than 6000 stocks in 45 countries and find that during the pandemic, the ESG-FP relationship is heterogeneous depending on home countries' stocks. More specifically, they find that the effect of ES on abnormal returns is positive and significant for companies located in Canada and USA but insignificant for other regions (Europe, Japan, Asia-Pacific, and Emerging Countries). Moreover, the social pillar shows a positive impact only on North America. Taken together, we expect that the ESG-FP link would not be the same in a global setting while shedding light on the heterogeneous response to the pandemic of socially responsible firms worldwide. In the same context, Engelhardt et al. (2021) suggest that ESG is significantly important for low-trust countries or countries with poor security regulations and disclosure requirements, while Bae et al. (2021) find that the relationship is positive for companies located in Democratic states. Ding et al. (2020) prove that the firms in rich countries have withstood the pandemic better than those operating in poor countries, given the considerable resources needed to address this crisis. Thus, the effect of ESG factors on a firm's performance is contingent on countries' characteristics and income classification. Accordingly, we formulate our second hypothesis as follows:

Under the new emergent ESG-efficient frontier, Pedersen et al. (2020) attempt to reconcile the opposing views about the costs and benefits of responsible investing. They empirically prove that most investors choose portfolios on the ESG-efficient frontier and show how ESG screens can have surprising effects.

Based on the cost-efficiency principle, ESG investments should be well-balanced and not excessive. The debate triggers another important question that was tackled in previous studies. What is the optimal level of ESG investments? Mittal et al. (2008) and Barnett & Salomon (2012) proved the existence of a U-shaped ESG-FP relationship. ESG activity in its early stage negatively affects FP as costs outweigh benefits, whereas the relationship reverts and becomes positive at a later stage. The U-curve relationship is supported by Nollet et al. (2016) in the context of US corporations, El in the MENAT region, and by Han et al. (2016) in the spectrum of Korean corporations. From another perspective, some studies conducted the analysis from an investment perspective. Hartzmark & Sussman (2019) find that investors actively responded to the 'shock to the salience of the sustainability', steering money away from funds with low portfolio sustainability ratings to those with high ratings.

In the context of the pandemic, Ding et al. (2021) discuss how ESG performance, among other factors, could provide 'corporate immunity' and find that high-CSR firms perform better in response to the J o u r n a l P r e -p r o o f 8 pandemic. More recently, Lee & Lu (2021) investigate the impact of the pandemic on the Taiwan stock market and find that companies with CSR commitment were less affected. However, Takahashi & Yamada (2021) find that the ESG score, in all quintiles, has no impact on the abnormal returns of Japanese companies during the pandemic, a similar finding to the performance of Japanese companies during the GFC (Berkman et al., 2021) . On a global level, Gianfrate et al. (2021) mention that although firms with higher ESG achieve higher returns during the COVID-19 crisis, this positive relationship is conditional on the home countries' stocks. Thus, there is a growing agreement that the ESG-FP link might correlate with companies' level of ESG, as a high ESG score is associated with a lower cost of debt and equity, which will increase the company's valuation, leading to better performance. Hence, we develop the third hypothesis of this study:

Connectively, three important theories emphasize the cash management practices: trade-off theory, pecking order theory, and free cash flow theory. The optimal level of cash and short-term investments has long intrigued many researchers. According to the trade-off theory, firms maintain the optimal level of cash at the breakeven point where the marginal cost and benefit of holding cash are equal (Al-Najjar & Belghitar, 2011; Martínez -Sola et al., 2013) . In this perspective, companies tend to appropriately manage short-term assets as keeping a high level of cash arises as an idle investment while lowering it could probably threaten firms' day-to-day activities. Added to this, companies should be aware of exogenous competitive factors that might alter normal liquidity levels, and this specific problem might become steeper in times of conflicts and major disruptions. From another perspective, the pecking order theory grounded by Myers and Majluf (1984) showcases an overarching financing preference mode that prioritizes internally generated funds and liquid assets, followed by debt issuance and equity as a last resort. In the context of the recent global crises, several studies stress the importance of liquidity and cash levels to surmount sudden shocks and unexpected disruptions. As such, they have accounted for the effect of financial conditions and leverage while investigating the causal ESG-FP relationship (Giroud & Mueller, 2017) . Other analyses were triggered to test the link while conferring great emphasis to cash holdings (Fresard, 2010) and lines of credit (Berrospide & Meisenzahl, 2015) . Yet, in the context of GFC, many studies have contemplated firms' ability to sustain by regarding key accounting variables embedded in their balance sheets (e.g., Kahle & Stulz, 2013) . The pandemic outbreak created a new environment in which the imposed governmental restrictions disrupted the economic activity, leading to a decline in firms' revenues. The result was a dramatic decline in firms' liquidity (De Vito & Gómez, 2020) with a reluctance from lenders to provide funds. Thus, financial flexibility is a must in dealing with financial distress (Fahlenbrach et al., 2020) . In line with shareholder theory, an increase in ESG will improve financial performance for companies enjoying liquidity and J o u r n a l P r e -p r o o f 9 flexibility. However, illiquid firms might be obliged to reduce their ESG projects to lower costs and maintain flexibility. The contemporary studies of Albuquerque et al. (2020) and Ramelli & Wagner (2020) pinpoint important factors that led to stock price rebound during the COVID-19 pandemic. Still, they clearly state that cash and debt levels were two key aspects for companies to sustain. Coupled with this, the access to liquidity and reliance on a quick line of borrowing prove to act as a buffer shock against the pandemic (Acharya & Steffen, 2020), whereby firms with higher cash holdings and lower financial leverage are relatively less affected (Fahlenbrach et al., 2020; Ramelli & Wagner, 2020) . Hence, we formulate our fourth hypothesis as follows:

Hypothesis 4 (H4): The positive link between ESG and FP is stronger for firms with greater cash holdings.

From a deeper perspective, it is important to disaggregate ESG pillars and contemplate if they move in tandem. In other terms, it will be interesting to discover which pillar is strongly associated with financial performance and what specific pattern it follows. The pillar effect on FP was investigated by Nau & Breuer (2014) , who found unequal and divergent effects when addressing separately the environmental (E), social (S), and governance(G) factors. Based on stakeholder and legitimacy theories, social performance improves financial performance (Freeman et al., 2010; Velte, 2017) , public perception (Gangi et al., 2019) , and reputation (Salman & Laouisset, 2020) Moreover, companies must rethink their value chain structures, reconceive governance mechanisms (Youssef & Diab, 2021) , and innovate business models (Elali, 2021; Shashi et al., 2021) . According to the agency theory, governance practices positively affect performance by boosting reputation, increasing supervision, and mitigating mismanagement (Zehri & Zgarni, 2020) . Interestingly, Queiri et al. (2021) found that some governance elements positively correlate to FP while others behave oppositely.

From an environmental perspective, the stakeholder and resource-based theories, there is a positive relationship between environmental practices and FP (Youn et al., 2013) . Green ecological activities such as resource efficiency (Beckmann et al., 2014) , material waste, reuse, recycling, and energy consumption (Min & Galle, 2001; Zsidisin & Siferd, 2001 ) yield performance. Nakao et al. (2007) find that scoring high on environmental performance is seen as an 'important strategic factor'. Environment practices lead to J o u r n a l P r e -p r o o f higher productivity, better customer service, enhanced employee morale, resulting in financial gains such as Return on Investment (ROI) (Green et al., 2012; Laosirihongthong et al., 2013) .

Given the inconclusive evidence on the relationship between ESG and FP during the pandemic, it is important to go deeper to understand what pillars affect the company performance in line with previous studies (Capelle-Blancard & Petit, 2017) . Broadstock et al. (2021) show that the cumulative returns of Chinese companies are positively and only affected by the environment and governance pillars, concluding that both pillars are more tangible metrics for a firm's strength during the pandemic. Boldeanu et al. (2022) show the different impacts of ESG pillars on the renewable electricity firms in Europe, whose abnormal returns are positively affected by the environmental and social scores during the pandemic. They also find that when the ESG score is not statistically significant during the pandemic, It is important to weigh the impact of each ESG pillar. They conclude that each pillar is differently affected based on its respective sector and surrounding context. Moreover, the COVID-19 crisis is expected to stimulate a green recovery, as pointed out by a PWC report 7 . Given that the protection of the environment will be a priority plan, investors might put more emphasis on environmental performance. Thus, we formulate our fifth hypothesis as follows:

Hypothesis 5 (H5): FP is differently affected by each ESG pillar.

In our study, we extract data about G20 8 countries from Refinitiv Reuters. We first get 4,528 firms with available ESG scores. Then, we search for firms with available financial reports for 2020. This refinement results in a sample of 4,380 firms based on Return on Assets and Return on Equity and 4,242 based on the Price to Book variable. Further details on the sample determination are provided in Table 1 . Data for firms' financial performance and control variables are retrieved from Reuters, while macroeconomic data are collected from Oxford COVID-19 Government Response Tracker (OxCGRT). 

The dependent variable is Financial Performance (FP) and is measured using accounting-and market-based 

This study investigates the impact of ESG practices on performance amid COVID-19. The main independent variable is the ESG score collected from the ASSET4® database provided by Refinitiv, which is considered as one of the most reliable sources of data (Galbreath, 2018; Ortas et al., 2013 Ortas et al., , 2015 . ESG comprises seventy key performance indicators, classified into 18 measures measuring three pillars, namely

Environmental Score, Social Score, and Governance Score, as described below:

-Environmental score (ENV): It analyzes the contributions of companies to their environment. It reveals the level to which a firm uses management practices to reduce environmental risks and includes resource use (water, energy, sustainable packaging, and environmental supply chain), innovation (implement new ideas, improve services, and create dynamic products), and emissions (CO2 emissions, waste, biodiversity, and environmental management systems) (Thomson Reuters, 2017 ).

-Social score (SOC): It discusses how well the company treats customers and focuses on four areas: a workplace (diversity and inclusion; career development and training; working conditions; and health and safety), human rights (a commitment to both business ethics and human rights that will be driven by values such as dignity, justice, fairness, equality, respect, and responsibility), community (wellbeing of society, positively benefiting society), and product responsibility (healthy product, product safety and instructions) (Thomson Reuters, 2017).

-Governance (GOV) is evaluated in three dimensions: management, shareholders, and corporate social responsibility strategy. Each subcategory contains several ESG themes (Thomson Reuters, 2017 ).

The score for each of the three pillars ranges from 0 to 100. Notes: Figure 1 represents the median, maximum, minimum, and interquantile range descriptive statistics of our dependent variables (ESG, ENV, SOC, and GOV) for 4,380 observations across 11 GISC sectors. ESG=Environmental, social, and governance score; ENV= Environmental score; SOC= Social score; and GOV= Governance score. Data is collected from ASSET4® database provided by Refinitiv. Source: Author's calculation

To inspect the nexus between ESG and FP, several control variables are included. They are subdivided into two broad categories: firm-and country-level variables.

To account for their confounding effects, some company-specific characteristics should be controlled when studying the ESG-FP link. More specifically, firm's size (SIZE), leverage (LEV), slack resources (SLACK), and loss (LOSS) were taken into consideration as follows:

-Size (SIZE): It is measured as the natural logarithm of total assets. Larger companies generally have a greater capability of implementing sustainable business models. Moreover, size affects economies of scale and FP (Najaf et al., 2020; Ramaswamy, 2001) .

-Leverage (LEV): It is measured as debt divided by total assets and is included since the capital structure influences financial performance (Zeitun & Tian, 2007) . Moreover, it was found that the impact of leverage on FP is positive in some studies (Akhtar, 2012; Oware & Mallikarjunappa, 2021) , and negative in other studies (Ali et al., 2020; Foo et al., 2015; Margaritis & Psillaki, 2010; Pouraghajan, 2012) . However, during market downturns, Opler & Titman (1994) pinpoint the significant extent of leverage impact on firms' daily activities and operating performance.

-Financial Slack: It is defined as cash and short-term investments divided by total assets and is a good predictor of a firm's capacity to react to any unexpected contingency (Liargovas & Skandalis, 2008) such as COVID-19. Fahlenbrach, Rageth, & Stulz (2020) and Ramelli & Wagner (2020) show that companies with higher financial flexibility (i.e., more cash and less debt) did significantly better during the COVID-19 crisis (Bates et al., 2009; Eggers, 2020) .

-Loss Indicator (LOSS): It is a dummy variable equal to 1 if net income is negative, and zero otherwise. It is included since there is an association between FP and financial loss faced by a firm (Byard et al., 2006) .

All continuous variables (dependent and control) are winsorized at the 1st and 99th percentiles.

Since our sample includes firms operating in different countries, we include a set of country-level variables to control for government response to COVID-19. The latter comprises four variables made publicly available by the Oxford Coronavirus Government Response Tracker (OxCGRT) 9 :

-Economic Support Index (EI): It records two measures: income support (stimulus, etc.) and debt relief (rescheduling, forgiving a portion of the debt, etc.). The index on any given day is calculated as the mean score of four indicators, each taking a value between 0 and 100.

Where is the number of component indicators in the index and is the sub-index score for an individual component indicator. -Stringency Index (SI). It is calculated by using nine scaled indicators, including eight containment and closure indicators (school closures; workplace closures; cancellation of public events; restrictions on public gatherings; closures of public transport; stay-at-home requirements; restrictions on internal movements; and international travel controls) and public information campaigns 12 . This index records the strictness of government policies without implying the appropriateness or effectiveness of a country's response. Since this index is part of CHI, we cannot include it simultaneously with CHI due to the multicollinearity problem. Figure 2 shows the country's score on each index. Economic support receives the lowest score for all countries, except Australia, France, Japan, Turkey, and United Kingdom. The figure also shows that countries' response significantly differs which highlight the need to control for such indices. Definitions of all dependent, independent, and control variables along with their acronyms and data source are shown in Appendix A.

Descriptive statistics for our sample firms are provided in Table 3 . 31.58% of firms reported negative income for 2020, while the average firm's ROA and ROE for that year was approximately -1.91% (-3.57%).

Surprisingly, the average total return is positive (22.61%).

The mean overall Refinitiv ESG summary score for sample firms is approximately 41.01 out of a theoretical maximum of 100. This variable is bounded between 0.37 and 94.11 which implies a high variation in our sample. The firms have the highest score on GOV and the lowest on ENV. The environmental score has a mean value of 28.64 with a standard deviation of 28.27. To more emphasize, many companies have an environmental score of 0 and most of them are concentrated in industries witnessing scarce reporting on environmental issues (Healthcare, Financials, and Technology). Slack seems to be negatively correlated with accounting FP, although it is expected that firms with an excess of liquidity would sustain during the market implosion. The negative sign of LEV with ROA and ROE is consistent with the expectation that firms with more significant debt burdens are less agile. Surprisingly, we find that SOC and ENV are highly correlated which might create a multicollinearity problem. As expected, GI is highly correlated with SI and CHI and SI is highly correlated with CHI. Thus, the regression model shall include either GI or CHI and EI at a time to avoid any multicollinearity problem. 

To center our problem, we run a number of variants on the following regression (with only one observation per firm, so firm and time subscripts are suppressed, while g refers to country):

These two equations measure the association between ESG, and the dependent FP variable measured by ROA, ROE, PB, and TR while controlling for firm characteristics and country control variables (Hypothesis 1 

The fourth model splits the sample based on cash holding by sector (Hypothesis 4). HighSlack is a dummy variable equals to 1 when slack falls in the top quartile:

The fifth and sixth equations include the association between each pillar and the dependent variable measured by ROA, ROE, PB and TR while controlling for firm characteristics and country control variables related to government response indices measured by GI in Equation 5 and by CHI and EI in Equation 6

(Hypothesis 5): 

Given the ample evidence that ESG-FP impact differs between countries, we perform a robustness check and split the sample into two main groups. Table 6 reports the results for developing (Panel A) and developed countries (Panel B). Interestingly, ESG seems to play a significant role only in improving ROA in developing countries. As for developed countries, ESG has a negative impact on ROE and TR significant at 10% and 5% respectively, while it has a positive impact on PB, significant at 5%. Again, the divergence in ESG impact on FP in developing versus developed countries confirms the findings of Singhania & Saini (2021) ESG stems as a strategic and long-term medium that leads to enhance companies' competitive advantage and foster their societal ties with surrounding environments. Hence, our second hypothesis is supported.

To further investigate the response to ESG levels (Hypothesis 4), we split firms into quartiles following ESG scores by industry and assign a metric for each group as follows: "ESG score 1" for 25% lowest, "ESG score 2" for the second quartile and so on. Table 7 reports the regression results for the quartile indicators of ESG scores. We omit the first group "ESG score 1" 13 for statistical reasons. For convenience, only equation 2 where we control for EI and CHI will be reported as similar results were obtained for Equation 1.

The results for ROA reveal that the coefficients on all ESG scores are positively significant, with ESG score 4 showing a significantly larger coefficient. As for ROE, only ESG score 3 and ESG score 4 are positive and significant. Results indicate that the impact of ESG on FP is asymmetrical and depends on ESG scores.

Similar to the baseline model, we identify a significant negative relationship between ESG and TR. Yet, this negative association prevails only for ESG score 2 and ESG score 3, while it turns out to be insignificant for firms whose scores fall in the top 4 th quartile. This supports the findings of Barnett & Salomon (2012) Deng et al. (2021) , Hartzmark & Sussman( 2019) , and other studies addressed the ESG effect from an investment perspective. Some identified a higher stock market performance for firms with higher ESG scores during the pandemic while others relate the importance of high ESG performance to regulate the level of financial risk, especially during crisis time. The main independent variables are the ESG score 2 (i.e., a dummy variable that takes the value of one if a firm has an ESG score in the second quartile of the distribution), ESG score 3 (i.e., a dummy variable that takes the value of one if a firm has an ESG score in the third quartile of the distribution), and ESG score 4 (i.e., a dummy variable that takes the value of one if a firm has an ESG score in the top quartile of the distribution). Control variables are winsorized at the 1% level in each tail. Standard errors are heteroscedasticity robust, clustered by country. Table A1 in the appendix defines all variables used in the paper. *p < .1; **p < .05; ***p < .01

Third, we complement this analysis by investigating the role of slack in affecting the ESG-FP link. The results of Table 8 support our baseline results and further stress the importance of ESG that stems as a driving factor for firms' performance (ROA) during the COVID-19 crisis (supporting Hypothesis 3 as well). The main independent variable is the interaction between ESG score and HighSlack (i.e., a dummy variable that takes the value of one if a firm has a slack score in the top quartile of the distribution). Control variables are winsorized at the 1% level in each tail. Standard errors are heteroscedasticity robust, clustered by country. Table A1 in the appendix defines all variables used in the paper. *p < .1; **p < .05; ***p < .01

At this stage, we presume that ESG is beneficial specifically during the COVID-19 outbreak and that there is a reward for responsible practices. The effect was manifested via a higher ROA in our former tests.

However, the reward appears to be tied up to specific aspects of ESG. To examine this link, we replicate Table 5 and derive Table 9 by replacing the overall ESG score with respective pillars scores. However, given the high correlation between SOC and ENV and to avoid multicollinearity, we run the regression by accounting for ENV and GOV on one side (Panel A), and for SOC and GOV on the other side (Panel B).

Results show that the coefficients on environmental scores are statistically not significant in all regressions.

As for SOC, it has a positive and significant impact only on ROA. Similarly, we find that the governance score coefficient is positive and significant for ROA, negative and significant for TR, while it shows no significant impact on ROE and PB. Given that the results in Panel A are similar to those in Panel B, we display here the results of Equation 6 where ESG is represented once by two pillars ENV and GOV then by SOC and GOV, while again controlling for government response proxied by EI and CHI due to correlation concerns. Table 9 , we examine the role of the pillars levels in Tables 10, 11, and 12. In Table   10 , we attempt to uncover convergence and divergence of results stemming from the test of the three models (ENV-FP; SOC-FP; GOV-FP) during the COVID-19 crisis by splitting our sample into developing (Panel A) and developed countries (Panel B). Then, in Table 11 , we split firms into quartiles based on their respective pillar scores and assign a metric for each group. Env score 1 is a dummy variable equal to 1 for the environmental score that falls in the 25% lowest and so on. Thus, table 11 reports the results of the quartile regressions. Results support the presence of an asymmetrical relationship. ENV score 2, ENV score 3, and ENV score 4 are now significant with a positive impact on ROA (Beckmann et al., 2014; Min & Galle, 2001; Zsidisin & Siferd, 2001) , supporting the superiority of environmental pillar.

Finally, Table 12 shows the contribution of the HighSlack Score (i.e., a dummy variable of one for a cash ratio that falls in the top quartile of the distribution) to the different measures of FP: ROA, ROE, TR, and PB while breaking the ESG down into its three pillars. In both regressions that account for ENV and GOV then SOC and GOV separately, we show that the higher the cash level, the higher the market performance (TR and PB) with a larger coefficient for TR (Acharya & Steffen, 2020; Ramelli & Wagner, 2020) . The opposite prevails for the link between HighSlack and ROA with no significance on ROE. There is no evidence of a significant impact of the environment pillar (ENV) and social pillar (SOC) on any of the performance measures shown in Table 12 . Nonetheless, the government pillar (GOV) seems to have a positive impact on ROA at 5% significance level but a negative effect on market performance measures (TR and PB) at 1% significance level. The significant positive interaction term between ENV and HighSlack score reveals that firms that combine a higher cash position with efforts to improve ENV score can reduce the negative impact of HighSlack on ROA and has a positive contribution to ROE (Acharya & Steffen, 2020). Furthermore, there is no impact of the interaction between ENV and HighSlack on market performance measures (TR and PB). We show the same for the interaction between HighSlack and SOC which seems not to affect all performance measures. In this sense, the trade-off theory might explain these conflicting results, as firms maintain the optimal level of cash at the breakeven point where the marginal cost and benefit of holding cash are equal (Al-Najjar & Belghitar, 2011; Martínez -Sola et al., 2013) .

The last interaction term between HighSlack and GOV has a positive coefficient significant at a 5% confidence level, which can be interpreted as an interaction contributing to reduce the negative impact of HighSlack on the accounting performance ROA. When it comes to market performance measures, the interaction term between HighSlack and GOV turns out to be negatively significant on TR at 10%. This result can be perceived as contributing to increase the negative impact of GOV on TR and/or reducing the positive impact of HighSlack on TR in the regression that solely includes SOC and GOV out of the three ESG pillars.

J o u r n a l P r e -p r o o f 31 All these opposing results open the door for another intriguing question: What is the optimal level of investment in each ESG pillar? This point was investigated and pinpointed as a U-curve relationship studied by Nollet et al.(2016) , and advanced by the search for the inflection points studied by El Khoury et al.

(2021). Added to this, the issue of corporate short-term policies and the quest for the optimal cash level are focal points to address in the presence of such exceptional circumstances as COVID-19. The statement "cash is more important than your mother" 14 proves the importance of liquidity in crisis times and its role to support companies. Yet, there exists also here infliction points as cash level can act as a buffer shock in extreme case scenario while it might turn to be an idle investment for excessive levels. This can maybe explain the divergent results depicted in ESG pillars. The triple dimensional interaction of people, structure, and processes fosters cash excellence and implicates to follow prudent cash and liquidity strategies. In doing so, companies can prevent financial distress and potential bankruptcy 15 where the shift from earnings before interest and taxes to cash became more centric. All of the preceding elements along with the country, industry, institutional, and regulatory frameworks, can explain the divergent results when testing the cash level in the context of ESG pillars and the effect of cash holdings to mitigate adverse exogenous market shocks (Zheng, 2021) . 

Equation 5b Equation 5c Equation 5d Coefficients This table reports the results of regressions of firms' ESG pillars using different measures of FP: ROA, ROE, TR and PB. The main independent variables are the ENV score 2 (i.e., a dummy variable that takes the value of one if a firm has a ESG score in the second quartile of the distribution), ESG score 3 (i.e., a dummy variable that takes the value of one if a firm has a ESG score in the third quartile of the distribution), and ESG score 4 (i.e., a dummy variable that takes the value of one if a firm has a ESG score in the top quartile of the distribution). Control variables are winsorized at the 1% level in each tail. Standard errors are heteroscedasticity robust, clustered by country. Table A1 in the appendix defines all variables used in the paper. *p < .1; **p < .05; ***p < .01 Table A1 in the appendix defines all variables used in the paper. *p < .1; **p < .05; ***p < .01

This paper explores the impact of sustainable investments on the performance of G20 companies in times of exceptional crisis stemming from a worldwide health emergency. We extract data related to ESG scores and companies' financial performance from Refinitiv Reuters for the year 2020. FP measures were proxied by ROA, ROE, TR, and P/B. We control for the firm-and country-level variables. The novelty of the study resides in the fact that it also controls for the efforts deployed by governments to preserve global health and support the business sector through providing funds, debt reliefs, and extensions. Our findings contribute to the burgeoning literature on ESG during COVID-19 when academic research continues to be challenged by the variability and lack of standardization with ESG data on one side and the lack of distinction between different investment strategies on the other side. We offer a deeper analysis of the link between ESG and financial performance, which provides insights to researchers and corporate decision-makers. Although the growing body of literature infers that good corporate management and disclosure of ESG typically results in improved financial performance, we show that this presumption J o u r n a l P r e -p r o o f 37 is valid for accounting performance but not for market performance. This suggests that investors may be sensitive to specific factors such as the sustainable investing strategy employed by corporations. ESG metrics do matter, but measuring them without an accompanying strategy seems ineffective (Whelan et al., 2021) . Hence, academic and investment studies and corporate managers need to better distinguish between different types of responsible investment strategies and their performance implications on investors in order to better assess the ESG-FP relationship. They also have to consider other mediating factors such as innovation and operational efficiency metrics that might drive better corporate performance when combined with responsible investment.

However, we recognize some structural limitations. First, though we have incorporated OxCGRT metrics to allow for efficient and cross-national comparisons of government interventions, yet they still present some drawbacks. They don't constitute a clear-cut measure of the appropriateness or effectiveness of a government's response as they do not properly reflect on how well policies are enforced, nor do they capture demographic or cultural characteristics that may affect the spread of COVID-19. Second, we might have omitted important variables or factors that can improve financial performance such as sustainabilitydriven innovation, operational efficiency, etc. Third, we fail to account for some specific aspects that shed light on high ESG integration within a country's perspectives like culture and urbanization.

Further research may conduct a longitudinal study of the ESG effect on FP while accounting for the temporal effect of profitability indicators and country-level variables. Researchers are also encouraged to test whether the implication of optimal capital structure affects ESG investments. It would also be interesting to explore the optimal ESG portfolio in the context of G20 countries. J o u r n a l P r e -p r o o f 

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