COMPARISON OF RETURNS AND RISKS OF ESG-BASED INVESTMENTS BETWEEN DEVELOPED AND EMERGING CAPITAL MARKETS DURING THE COVID-19 CRISIS

Abstract

This study examines the ability of high-ESG securities to generate excess returns and demonstrate resilience during financial crises. It compares developed markets (US and Japan) with emerging markets (China and Thailand) across three periods: pre-crisis (2018-2019), the COVID-19 crisis (2020-2021), and economic recovery (2022-2025). The research constructs simulated portfolios from the top 50 companies by market capitalization in each country, dividing them into High ESG (Top 30%) and Low ESG (Bottom 30%) portfolios using equal-weight allocation and monthly rebalancing. A Long-Short ESG Factor strategy isolates the ESG premium, while a Lagged Portfolio approach mitigates look-ahead bias. Performance is evaluated using the Sortino Ratio and CAPM, with robustness verified via Newey-West and Brown-Forsythe tests. The findings reveal structural differences: developed markets show high-ESG concentration in technology and innovation, acting as safe havens by reducing volatility and beta during market downturns. Conversely, emerging markets concentrate in traditional industries, with Thailand tending to amplify risk during crises. However, China demonstrates a significant ability to generate positive alpha during the recovery period, particularly among low-volatility securities. Overall, ESG factors play distinct roles based on market development. In developed markets, ESG serves primarily as a risk management tool, whereas in emerging markets, it acts as a return-enhancing factor. These insights offer valuable implications for international portfolio allocation amid global economic crises.

Keywords: ESG Investing, Financial Crisis, Developed vs. Emerging Markets, Risk Management