Market Reaction to Corporate ESG News

Photo by Adeolu Eletu on Unsplash

A recent paper by George Serafeim and Aaron Yoon explores the market reaction to different ESG news. They analyze the market reaction to ESG news for 3,109 companies. They find that prices react only to financially material ESG news, and the reaction is larger for news that is positive, receives more news coverage, and is related to social capital issues. They conclude that investors are motivated by financial rather than nonpecuniary motives as they differentiate in their reactions based on whether the news is likely to affect fundamentals.

This paper has important implications:

  1. ESG news contains value-relevant information.
  2. Portfolio managers who integrate ESG ratings into their investment decisions will likely generate better returns.
  3. Investors need to understand that the market does not react to all types of ESG news equally; hence, specific types of news become important in generating returns.
  4. Given that price reaction is larger for positive ESG news, which receives more news coverage, and relates to social capital issues relative to natural or human capital issues, a market participant can focus on these news types in their capital allocation decisions.

Paper by Serafeim and Yoon:

Published by Utkarsh Majmudar

Utkarsh Majmudar is a Fellow, IIM Ahmedabad and a professional with experience encompassing academics and administration at top business schools in India (IIM Lucknow, IIM Udaipur, and IIM Bangalore) and working with large corporations. His interest areas include corporate finance and CSR.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: