Companies that develop responsible Environmental, Social, and Governance (ESG) practices and strive to mitigate ESG risks experience fewer noteworthy ESG-related controversies and potentially generate better shareholder returns. These are the key findings of two new research studies released that show that ESG risk management policies and actions, and the ESG scores that measure them, contain financially relevant information for investors.
The Business Impact of ESG Performance
Considerations around the Environmental, Social, and Governance (ESG) aspects of companies have become a factor widely taken into account by investors and other market participants, consumers, and stakeholders. Using ESG controversies collected by Moody’s ESG Solutions and ESG data from RepRisk, we analyze the effects of ESG performance on firm market value. Our findings show that ESG controversies lead to large, statistically significant negative abnormal equity returns, both in the short-run and over a one-year horizon. We find that moderate to severe ESG events generate abnormal stock market losses of −1.3% to −7.5% over twelve months, which represents a loss of approximately $400 million for a typical-sized firm in the study.
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Measuring Persistence in ESG Risk Management Culture
Are reports of Environmental, Social, and Governance (ESG)-related controversial events isolated or indicative of broader problems within a firm? Are controversial events more often observed in larger companies and certain sectors and regions? After controlling for these factors, we find that companies with a history of controversial ESG-related events are more likely to experience controversies in the future. This paper presents a methodology to measure a firm’s likelihood for future ESG controversies relative to firms of comparable size, region, and sector. We also find that firms that improve their ESG culture (as indicated by improved Moody’s ESG Assessment Scores) experience a reduction in the rate of future controversial ESG events.
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