  Citation: Mousa, M.; Saleem, A.; Sági, J. Are ESG Shares a Safe Haven during COVID-19? Evidence from the Arab Region. Sustainability 2022, 14, 208. https://doi.org/10.3390/ su14010208 Academic Editor: Zhichuan (Frank) Li Received: 14 November 2021 Accepted: 21 December 2021 Published: 26 December 2021 Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affil- iations. Copyright: © 2021 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/). sustainability Article Are ESG Shares a Safe Haven during COVID-19? Evidence from the Arab Region Musaab Mousa 1 , Adil Saleem 2 and Judit Sági 3, * 1 Department of Finance, International Business School (IBS), 1031 Budapest, Hungary; mmousa@ibs-b.hu 2 Doctoral School of Economics and Regional Sciences, Hungarian University of Agriculture and Life Sciences, 2100 Godollo, Hungary; saleem.adil@phd.uni-szie.hu 3 Faculty of Finance and Accountancy, Budapest Business School, 1149 Budapest, Hungary * Correspondence: sagi.judit@uni-bge.hu Abstract: The world experienced significant changes in its social and economic lives in 2020–21. Major stock markets experienced an immediate decline. This paper attempts to examine the im- pact of COVID-19 on stock market performance as well as to identify the differences between the responses of ESG stocks and normal stocks to pandemic conditions in the Arab region. Daily time series for three years between March 2019 and March 2021 were collected for the S&P Pan Arab Composite index and S&P/Hawkamah ESG Pan Arab Index. We used a generalized autoregressive conditional heteroscedasticity (GARCH) model to measure market shocks and a non-linear autore- gressive distributed lagged (NARDL) regression model to display the relationship between COVID-19 measurements and the performance of stock indexes. The findings suggest that the volatilities of ESG portfolios and conventional ones were equally affected in the pre-COVID period. However, in the post-COVID period, the magnitude of volatility in the ESG stock index was significantly less compared to that of the conventional stock index. The results also revealed that in the ESG market, shock tended to remain for a shorter period. Furthermore, the ESG index was not affected by the number of confirmed cases and deaths. However, evidence of asymmetric long-run cointegration existed between the S&P index and number of cases and deaths. Increases in the numbers of cases and deaths caused a decline in market index, whereas the reverse trends were observed in the retreat of the pandemic. Keywords: ESG; COVID-19 pandemic; capital markets; sustainable finance 1. Introduction The COVID-19 pandemic induced an unprecedented crisis in the global economy. No country was able to escape the serious consequences of the pandemic, and the vast majority of countries experienced partial or full lockdown. Since the World Health Organization announced the virus as a pandemic on 11 March 2020, government measures accelerated to maintain the health system, on the one hand, and to mitigate the economic effects of the crisis on the other. At time of writing, the challenge of vaccine development and deployment is being addressed. By the end of 2020, estimates indicated a contraction in many major economies, with increases in unemployment rates and number of bankruptcies. According to the World Bank, the number of countries experiencing a per capita income decline was the highest since 1870 and there was an economic retraction of 7% in developed countries, compared to 2.5% in developing and emerging economies [1]. Inherently, the COVID-19 pandemic led to a conclusive degree of uncertainty. As in the real economy and product market, the crisis also affected the financial economy, especially the financial market, which is characterized by high sensitivity to events and relative information, particularly during crisis periods where many events and phenomena such as natural disasters, wars and pandemics have been analyzed to demonstrate a non-financial side of market behavior that contributes to five to thirteen Sustainability 2022, 14, 208. https://doi.org/10.3390/su14010208 https://www.mdpi.com/journal/sustainability