Corporate Market Reacts to ESG News, Harvard Study Finds
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Research process
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The results of the research
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What this means for the market and investors in general
The Research
A paper on the market reaction to ESG news that was Harvard recently published highlights the importance ESG has on broader market decisions. The paper utilized a unique dataset that tracks daily ESG news across thousands of companies to determine what ESG news investors reacted to and why. Their sample includes 111,020 individual firm-day observations for 3,126 companies with ESG news and uses data from TruValue Labs (TVL) to help classify news as either positive or negative and to tie the news to a specific ESG topic. Older research on the corporate market reaction to ESG news did not focus on how financially material the news was for a given industry, which is where this research differs.
Results of the Study
The research from Harvard found a significant market reaction to the news that was considered financially material to a company’s industry. Specifically, there were significant positive price reactions to positive ESG news that was considered financially material. When the sample was restricted to news that was financially material (and that received more attention), the survey found negative news led to negative price reactions. No significant price reaction was found for the sample of ESG news not considered financially material to a specific company’s industry. The type of ESG news that generated the largest and most significant market reactions for both positive and negative news was classified under social capital with news that primarily relates to product impact as a close second. There were also more minor but significant market reactions to negative natural capital-related news and positive human capital and business model innovation-related news.
While the results found significant market reactions to ESG news, they also found these reactions to be based on financial motives rather than non-pecuniary motives. However, given the nature of corporate and financial markets, that conclusion isn’t wholly surprising.
Markets and ESG
The results from the paper indicate that news related to the ESG issues of a company has a significant effect on how the market reacts. Investors are concerned about how well a company adheres to ESG principles that are financially relevant to the company in question — with specific concerns over whether the product impact from this company is positive or negative, as well as how they treat their human capital. Due to this concern, hearing negative ESG-related news about a company will result in an adverse price reaction (and vice versa for positive news).
This demonstrates that investors who aren’t paying attention to ESG should begin to become more involved in it, as the market could react negatively or positively to a company they’ve invested in based on the ESG-related news about them.
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