U.S. Stock Market Reaction to ESG News

Monash University | March 17, 2020

This study reveals the benefits of a calm and measured approach to trading around bad-ESG news on U.S. stocks

U.S. Stock Price Overreaction to ESG Controversies - Introduction

While the existential benefits of ESG investing are apparent, the authors of this white paper investigate a possible negative side-effect from the trend towards ESG by examining how this approach to investing might affect the stock market efficiency.

Amid an increasing global focus on environmental, social, and governance issues in listed stocks – the so-called ESG factors – researchers have turned their attention to the impact on markets and investment performance of the ESG phenomenon.

What are the implications for investors when the stocks in their portfolio undergo ESG controversies? And how should investors navigate the market following the release of ESG related news?

These are some of the issues under the research spotlight as more investors include environmental, social, and governance issues in their decision-making criteria.

How the U.S. Stock Market Reacts to Positive and Negative ESG News

This study by Bei Cui and Paul Docherty uncovers new evidence and insights into how institutional investors behave collectively in response to ESG news events (both positive and negative), with implications for adjusting portfolios subsequent to ESG controversies, and how this may present opportunities for investors – particularly those of contrarian bent – to profit.

  • Investors’ over-emphasis on ESG considerations leads to markets overreacting when companies are subject to negative ESG news
  • Market overreaction is much more pronounced for bad-ESG news than for good news
  • The overreaction to bad-ESG news is more pronounced for smaller firms and stocks held by more transient investors before the announcements
  • Due to market overreaction, contrarian investors may be able to profit from the unpopular strategy of buying stocks after the release of negative ESG news
  • Investors wishing to reduce exposure following bad-ESG news can sometimes be better off waiting – in some cases up to 90 days after the announcement - to execute the necessary trades at a better price, depending on the category of ESG news and firm size

abnormal returns trading volume ESG news annoucement

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 today.

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