ESG Research Update
/Ethical investors jumping the gun at bad ESG news
A study has found that investors overreacting to bad ESG news is causing wild fluctuations to the share market. The research found that investors were better off if they waited, sometimes up to 90 days, for bad news to pass before making any trading decisions. These fluctuations could result in long-term financial underperformance of some ESG assets.
The research was published by Dr Bei Cui at Monash University’s Centre for Financial Studies and analysed over 331,000 ESG news events between January 2000 and December 2019. Dr Cui looked into large and mid-cap equities across 23 market countries including Europe, North America, Australia, Hong Kong, Singapore and the United Kingdom.
The research is believed to be a world-first in terms of testing the extent of market reaction to ESG controversies, as most previous studies didn’t look quite as far past the event.
Key findings of the study include:
Investors tended to overreact when companies were the subject of negative ESG news, causing share price falls and an exodus of unit sales
Investors or fund managers were better off waiting, in some cases up to 90 days, before acting
As institutional investors saw a negative event to the ESG attributes of a stock, they overestimated the probability of further shocks, with a subsequent tendency to sell, and stock prices falling more than required
The price reaction to ESG news is more pronounced when it came to firms with a higher institutional holding in US companies before the news release
There is a significant decrease in holdings after bad ESG news compared with changes after good news
Traders may be missing an opportunity to make more money on their shares when selling
There is considerable evidence that bad news events were leaked, with cumulative abnormal returns occur several days before the news is announced
To read the full release, visit Monash Impact
