BLOGISARJA 4/6 tutkimustietoa palkituilta Finsif Stipendiaateilta-ESG Reputation – Does it pay off?

Reputation – a general opinion or judgement that constantly affects how stakeholders feel and act towards a company. Breaking down how a positive company reputation is formed, the significance of ESG cannot be emphasized enough. It’s no longer about what a company does, it’s about how they do it.

Does ESG reputation matter then? In my research “Reputational capital as a factor for new ESG information”, I take a more detailed look into ESG reputation. More specifically, how ESG reputation of a whole industry affects short-term changes in stock prices after they publish new ESG information. In other words, are the companies operating in a sector with a positive ESG reputation rewarded for their overall good past performance? The study examined companies of S&P 500 index and reviewed events published between 2015 and 2020. Companies are considered from all 11 sectors divided by GICS. An average ESG score for every sector is then calculated for each year from the company ESG scores found in database provided by Refinitiv. This stands for industry and year-specific ESG reputation.

Research Findings
The short answer is that there are advantages to be gained from a good industry ESG reputation if new ESG-related information is published on the markets. Research shows that if positive ESG news is published, companies operating in sectors with good or poor ESG reputation, no significant changes in stock prices are found. However, when negative ESG information is published, companies operating in sectors with poor ESG reputation suffer a significant stock price decrease. In comparison, a company with a good ESG industry reputation publishing negative ESG-related news, does not experience similar drop in stock price. Thus, a positive ESG reputation operates as a shield in case negative ESG-related news is published and a negative sector ESG reputation is a burden for companies.

ESG is a multidimensional concept. Common ESG reputation of a sector is not solely responsible for defining companies’ stock price movements after publishing information. It is found that if newly published information were to be negative and highly unexpected, it resulted in a significant decrease in stock price. However, if the published information were to be somewhat expected, stock price did not change significantly even in the case of negative news. To sum up, if the published news surprised markets, this was a significant factor affecting short-term stock price changes.

I also examined how diverging from the peer group in terms of ESG reputation affected the market reaction after ESG news were published i.e., if it is beneficial for companies to differentiate positively from the peer industry companies. An example of such a practice could be a firm with a positive ESG reputation operating in an industry with a negative overall ESG reputation. Results show that positive news does not seem to affect stock prices regardless of company’s ESG reputation. Publishing negative news however does affect all companies significantly. Yet, negative news decreases stock prices more severely if a company’s individual ESG reputation is lower than its peer industry companies.

Building a reputation requires resources and is a time-demanding project. Nevertheless, it seems to be a fundamental factor for the overall reputation and stock price adjustment after new ESG information emerges. According to the findings of this research, ESG reputation does matter and should be embraced.

Elias Krell
M. Sc (Economics), Finance, Graduate from University of Vaasa, 2022