Insto investors ‘overreacting’ to ESG scandals
Companies which are the subject of bad environmental, social and governance (ESG) news tend to see greater share price falls as a result, according to a study from Monash University.
The study surveyed 331,000 ESG news events in 23 countries between January 2000 and December 2019, and found institutional investors overestimated the probability of a further shock happening again.
This then led to them having a “stronger tendency to sell” and causing a larger share price fall.
This indicated it was more advantageous for fund managers to wait until the ‘noise’ had passed before making any trade decisions.
“The significant negative abnormal return around ESG controversies – each of these countries had statistically significant negative abnormal returns – indicate that investors shun the company’s stock when it is involved in ESG controversies,” Dr Bei Cui from the Monash Centre for Financial Studies said.
“The research findings show traders have an opportunity to buy these stocks at a discount and then sell at a profit. It also suggests that investors wishing to reduce exposure following bad ESG news can sometimes be better off waiting, in some cases up to 90 days after the announcement – to execute the necessary trades at a better price.”
Cui said there was also evidence news of scandals was being leaked in advance of official announcements as the cumulative abnormal returns tended to occur several days earlier.
AUTHOR
Laura Dew
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