ESG Investing Part 2: Firms with Controversies - One Time Event or a Trend?
A meta-analysis of published research indicates that controversies tend to be a pattern and not a one-off event. They indicate underlying ESG issues that are not priced in by the market, and therefore controversial firms tend to under-perform, after controlling for documented sources of return. This interpretation is consistent with this evidence being stronger in the U.S than in Europe, simply because ESG issues are considered less in U.S than in Europe. ESG controversies also impact firm’s operational and financial results through negative impacts on reputation, suppliers, employees and other stakeholders. ESG controversies impact a firm’s cash position, capital structure and leverage, and capital investment decisions. The impact varies based on whether the firms were investment grade or high yield. These results again indicate that ESG issues matter for both debt and equity, and the impact varies across different geographies (indices) and across different parts of fixed income.