Moody’s Finds ESG Risk Mitigation Delivers Higher Returns.
Controversial events can cause lasting damage to shareholder value, analysis from Moody’s Analytics suggests.
Improved ESG practices lead to corporates acting as more secure investments, according to research papers by Moody’s Analytics in collaboration with ESG data firm RepRisk.
Findings from the ‘Business Impact of ESG Performance’ report showed significant and long-term effects of negative ESG-related events on firms’ stock returns.
The paper proposed a quantitative measure of ESG performance based on the controversies a firm experiences and studied the relationship between performance and stock market returns.
There have been several high-profile instances of firms facing lasting damage as a result of ESG-related failures. In 2015, Volkswagen shares dropped after it was revealed that the amount of carbon emissions from its vehicles were being deliberately underreported, while failures in corporate governance led to the collapse of US healthcare firm Theranos in 2018, and German firm Wirecard in 2020.
Covering 13,000 controversies at more than 3,000 public companies from 2013 to 2019, the Moody’s research found that ESG events have large and persistent negative effects on firm value, and the more severe the event the larger its impact. Moderate to severe ESG events resulted in an average -4% one-year excess equity return, which represents a loss of approximately US$400 million for a typical-sized firm in the study.
Moody’s said its findings were robust for firms of all sizes, and held particularly for firms in the energy and natural resources, consumer products, finance, and construction sectors.
But companies that learn from past controversies and revamp their internal ESG risk practices can lower their future rate of ESG events and reflect this improvement in their returns, the research also showed.
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