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July 11, 2023

ESG controversies hit stock performance by up to 5% after 6 months, says Clarity AI

Stockmarket graph
Clarity AI’s research found that ESG-related controversies can be responsible for share price underperformance of between 2 per cent and 5 per cent (Photo: Seemitch/Dreamstime)

New analysis has measured the share price impact of controversial incidents linked to ESG factors.

Platform Clarity AI, a sustainability reporting tool, assessed more than 10,000 controversial incidents for more than 1,500 companies between 2018 and 2022.

It found that after six months, environmental, social and governance-related controversies can be responsible for share price underperformance ranging from 2 per cent for more minor misdemeanours, up to 5 per cent for more severe incidents.

Clarity AI found that high-severity cases, and problems associated with the management of products and services and negative environmental impact, had the biggest effect on stock performance.

It also confirmed that a company’s market value will be more affected by controversies linked to topics that are particularly important to their industry, such as environmental controversies for the mining industry.

“Investors can perceive controversial incidents as a potential sign of poor management or a lack of ethics, which can erode investor confidence and make them less willing to invest in the company’s stock,” the platform said. 

“The legal and regulatory consequences of such incidents can also be expensive and time-consuming to resolve, further damaging the company’s reputation and market value,” it continued.

“Such incidents can disrupt a company’s operations, leading to a decline in productivity and profitability, which can negatively impact its market value”.

You can read the research here.

A service from the Financial Times