Abstract

The COVID-19 pandemic has had severe consequences for economies across the globe, causing panic across economies and triggering high levels of uncertainty among investors. Small-cap equities absorbed enormous damage as a result. In the United States, the Russell 2000 dropped by 41.6%. ESG practices have often been found to offer downside risk protection in times of crisis due to their insurance function, and the evidence found in this paper is consistent with this view. This paper uses a sample of small-cap firms to examine this relationship at the start of the COVID-19 pandemic (11 March 2020) and at the end of the COVID-19 pandemic (8 November 2021). This study finds that small-cap firms with higher ESG ratings perform better than those with low ESG ratings in the pre-COVID-19 and post-COVID-19 periods. However, ESG ratings are found only to drive performance in the former period.