Leveraging data from Moody’s ESG Solutions and RepRisk, an ESG data science firm specialized in ESG and business conduct risk assessments, the research draws a direct line from controversial ESG events that can be objectively measured – such as a chemical spill (environmental), the use of child labor (social), or corruption and bribery cases (governance) – and their business and shareholder impacts.
“We found that there is a meaningful benefit to a responsible ‘ESG risk management culture’ within a firm that can have a potentially material effect on equity returns,” said Doug Dwyer, Managing Director at Moody’s Analytics, who led the research. “ESG controversies can inflict reputational damage with significant financial and legal repercussions. Firms that actively manage these risks do a better job of boosting shareholder value.”
Covering over 3,000 public companies from 2013 to 2019, the research finds that, controlling for other market factors, controversial ESG events have large and persistent negative effects on firm value, and the more severe the event the larger its impact. Moderate-to-severe ESG events resulted in an average -4% one-year excess equity return, which represents a loss of approximately $400 million for a typical-sized firm in the study.
However, the research also showed that companies that learn from past ESG controversies and improve their internal ESG risk practices potentially reap benefits. Companies whose Moody’s ESG Assessments improved were likely to experience about 15% fewer ESG controversies going forward than those that did not. Moody’s ESG Assessments measure the extent to which companies integrate sustainability into their strategies, risk management, and operations, from the perspective of both business and stakeholder exposure.
“Together, the results of these research studies show the relevance of ESG controversies to a firm’s financial performance and, importantly, that companies can influence their ESG risk management cultures, while benefiting shareholders and other stakeholders,” Dwyer added.
Learn more about the research studies, Measuring Persistence in ESG Risk Management Culture and The Business Impact of ESG Performance.
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