Market Overreactions after Negative ESG News - A Global Phenomenon?

Monash University | August 04, 2020

Ethical investing considerations are now so pronounced they are impacting on market structure, but how widespread is the phenomenon outside the U.S.? A recent study investigates.

Environmental, Social, and Governance (ESG) issues are increasingly coloring investor decision-making to a point where they cause discernible market distortions, according to a recent study on U.S. stocks by researchers at Monash University. Now in a follow-up study, they seek to see whether the same effect is noticeable in a broader selection of global equities.

ESG Events

Investors are now so keen to avoid tainted stocks that they sell at the slightest hint of scandal causing the market to overreact to the downside, according to the original study - which made use of RavenPack’s complex ESG news event taxonomy.

Market overreactions following bad ESG-news tend to be short-lived, however, with prices mean-reverting over time, and this provides contrarians with the perfect blueprint for a trading strategy to ‘buy the dip’.

Initially, researchers focused on U.S. equities, however, in a recent follow-up paper “ESG Events and Global Stock Prices”, one of the original authors, Dr. Bei Cui, asked whether the same phenomenon was discernible amongst a universe of global equities.

Impact on Global Stock Prices

Using the same methodology as the original Monash study, Dr. Cui analyzed the reaction of equities in over 23 countries to negative ESG news events. Once again she employed RavenPack’s evolved ESG event taxonomy to help her with her analysis.

“I was able to isolate individual events in ESG-related sub-categories such as labor issues, war, conflict, security, pollution, civil unrest, industrial accidents, corporate responsibility, crime, and health. Events were categorized further – as positive or negative – using RavenPack’s news sentiment methodology,” says Dr. Cui.

ESG Returns in Canada, France, Japan and Switzerland

Her findings were that the phenomenon was more widely discernible in broader equity markets, with some notable exceptions.

“Patterns of market overreaction were similar across most countries surveyed, with a few notable exceptions,” says Dr. Cui.

ESG News Events and Sentiment Data

Easily implement the results of this White Paper using the RavenPack Analytics Platform, which includes ESG news event and sentiment data on over 50,000 companies, available via dashboards or our web APIs. Request a trial here.

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