Does ESG protect profitability in a crisis? Evidence from US industrial firms during COVID-19

Using the COVID-19 pandemic as a common macroeconomic shock to which firms were differentially exposed, we investigate whether pre-crisis environmental, social, and governance (ESG) performance was associated with corporate financial resilience, measured through return on assets (ROA). Two competing directional hypotheses are evaluated: the insurance-value hypothesis (H1a), under which accumulated stakeholder trust protects profitability in crises, and the short-run cost hypothesis (H1b), under which relatively rigid ESG-related commitments depress accounting returns when demand contracts. Using a panel of 70 US industrial firms over 2012–2021 (690 firm-year observations), a two-way fixed-effects (TWFE) difference-in-differences (DiD) framework compares changes in ROA across firms with stronger versus weaker pre-crisis ESG performance. The results are consistent with the short-run cost hypothesis: a one-standard-deviation higher pre-crisis ESG score is associated with an approximately 1.06 percentage-point larger relative decline in crisis-period ROA (continuous specification, p = 0.006), and high-ESG firms experienced a 1.97 percentage-point relative decline compared to low-ESG counterparts (p = 0.019; 95% confidence interval (CI) = −3.60 to −0.33; N = 70 firms), approximately 24% of mean ROA. Dynamic event-study estimates show no differential pre-trends and significant high-ESG differentials in both 2020 and 2021; the penalty is unchanged by controls for research-and-development (R&D) and advertising intensity, is imprecisely larger in the most pandemic-exposed industries in a triple-difference specification, and is attenuated within industry-by-year cells. Pillar-level estimates are precision-limited nulls. Where included, financial leverage is the strongest single predictor of crisis-period profitability. The findings are interpreted through a sustainability trade-off mechanism in which environmental and social commitments behave like fixed capacity investments that build relational value over the long run but increase operating leverage in the short run; they identify a robust profitability pattern consistent with this mechanism, rather than a direct evaluation of it, and caution against treating ESG ratings as guarantees of short-run accounting resilience.