Which Corporate ESG News Does the Market React To?

Which kind of ESG news truly move stock prices?

George Serafeim and Aaron Yoon performed an even study to answer this question in «  Which Corporate ESG News Does the Market React To? ».

The relied on a comprehensive dataset of ESG news events from 2010 to 2018 and focused on financially material news reported by more than 3 sources sources to measure short-term abnormal stock returns.

News events were also categorised by issue type (customer, environmental, workforce, etc.) to compare which ESG topics have the greatest influence. Their main findings include:

• Investors react significantly only to ESG news that is financially material to the firm’s industry. Non-material ones show no statistically significant stock price response, even if widely reported.
• On average, a positive material ESG event yielded about +0.60% abnormal return on the day of the news and +0.75% over a two-day window.
• When an ESG story received very broad coverage (5+ articles), the positive reaction jumped to roughly +2.18%, versus about –0.70% for a negative event.
• The upside from high-attention good news exceeds the downside from bad ones, which suggests investors reward major sustainability improvements even more than they punish missteps.
• News related to social capital elicited the largest stock movements, both for positive and negative news: on average +1.87% abnormal return on the event day (~+2.41% over three days).
• News concerning natural capitalhad significant impact primarily on the downside, which shows environmental controversies command more immediate investor attention than others.

This paper shows investors respond to ESG news when it signals changes to a company’s financial outlook, not due to moral considerations.

Positive news on material sustainability improvements is more that just good ethics, it can translate into tangible shareholder value. Conversely, companies suffer real market penalties for material ESG controversies, so managing those risks is critical.

This study is however a short-term analysis capturing immediate reactions, not long-run effects, on a period of rising ESG awareness before sustainability was widely monitored by markets.