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:
- ESG news contains value-relevant information.
- Portfolio managers who integrate ESG ratings into their investment decisions will likely generate better returns.
- 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.
- 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: https://www.hbs.edu/ris/Publication%20Files/WP21-115_397685a0-a044-4f86-8e6a-e4b9a0769cc7.pdf