Every Little Helps? ESG News and Stock Market Reaction

Do investors really care when a company makes ESG headlines?

Gunther Capelle-Blancard and Aurélien Petit analyse how everyday ESG news affects stock prices using an event-study approach in « Every Little Helps? ESG News and Stock Market Reaction ».

They studied a large dataset of about 33,000 extra-financial news items for 100 major companies between 2002 and 2010, classified them and measured abnormal stock returns around the announcements.

Their key conclusions include:

• On average, a negative ESG news event leads to a small but statistically significant stock price drop, ~-0.1% over a 3-day window. Positive ESG news yields no significant upside on average.
• The market’s punishment for ESG mishaps did not significantly intensify from 2002 to 2010, which challenges the notion of steadily rising investor awareness of extra-financial issues over that decade.
• Investors respond strongly when ESG news comes from independent media coverage, but essentially no reaction occurs for equivalent information issued via company press releases or NGO announcements.
• Companies with a better prior ESG reputation, either individual or inherited from their sector, experience smaller stock declines from negative news.
• If an ESG incident has a culturally proximate impact on shareholders, for instance a scandal in the company’s home country, the stock drop is larger.
• News with concrete financial or legal implications, like an event involving quantifiable costs or lawsuits, triggers a stronger reaction than ill-defined or purely ethical news.

These results stress the importance of monitoring ESG controversies, as even minor negative CSR events can shave off value as long as they are relayed by independent news sources beyond company-issued spin.

For companies, building a strong ESG reputation with credible third-party validation pays off as insurance against future mishaps: a proven track record of doing good can reassure shareholders against adverse news.

The finding that only financially and culturally salient ESG news moves stock prices highlights that investors focus on ESG issues that directly threaten or bolster financial performance, rather than altruistic concerns alone.

As this study focuses on short-term market reactions (within days of news), longer-term effects or lack thereof remain uncertain, especially considering the average impact (-0.1%) is small.