Exploring the nexus between ESG risk variations and investment preferences: Insights from sustainable ETFs during the COVID-19 era

This study analyzes the impact of Environmental, Social, and Governance (ESG) risk metrics on the financial performance of ETFs in the US and Europe from January 2020 to December 2023, particularly during the COVID-19 pandemic. It explores the influence of ESG investment trends on ETF performance and investor preferences between equities and bonds in response to ESG risk profiles. Results show a positive correlation between higher ESG standards and financial performance, measured by the Sharpe ratio, with a marked preference for bonds amidst increased ESG risks. This highlights the critical role of ESG considerations in investment strategies and risk management, providing insights for sustainable finance. • This study analyzed the impact of ESG risks on ETF performance during COVID-19 (2020-2023) using OLS and logistic regression. • This study analyzed the impact of ESG risks on ETF performance during COVID-19 (2020-2023) using OLS and logistic regression. • Investors preferred bonds over equities during high ESG risks, indicating a "flight to quality" response. • This study used Morningstar data on 204 actively managed ETFs in the US and Europe, focusing on sustainable investments. • The study highlighted the importance of integrating ESG risk assessments into investment strategies during volatile periods.