Investors are following ESG news closely but they mostly appear to be concerned about what impact that news will have on individual stock prices and the overall performance of their portfolios, a new study co-authored by Prof. Edward Watts of the Yale School of Management finds.
For their new paper, Watts, Stanford Ph.D student Qianqian Li, and Christina Zhu of the Wharton School examined the behavior of retail investors around more than 54,000 ESG-related news events for nearly 3,300 publicly traded firms between 2015 and 2022.
Over that time, they found, retail trading increases by 6% on ESG news days compared to nonevent days, a trend that increases to 8% using data just from 2020 on. They then went further to try to determine why trading increased: Are investors motivated by a desire to be socially responsible? Or are they instead driven by a news event’s potential impact on their returns?
The evidence in the paper points to the latter hypothesis, Watts writes in a Yale Insights online article: According to the researchers’ data, investors purchase securities when the implications of the news are positive for their stock’s performance, and they sell when the implications are negative.
“There’s been a tremendous amount of debate circling around these issues, but I don’t think we had much generalizable empirical evidence,” Watts says. “This is a simple exercise: Are people consuming this information through the news and trading around that? We’re trying to infer, in the aggregate, what people really seem to care about and how much they really care about it.”
One example cited: More retail investors sold Boeing BA stock than bought it following the company’s settlement of the 737 Max scandal — an ESG event with negative implications for performance that led to a 4% stock selloff. But they also sold shares of Occidental Petroleum OXY after the company announced increased investments in clean energy, an ostensibly positive ESG event that also coincided with a drop in its stock price.
In his class on ESG investing, Watts says, he offers an extreme hypothetical to drive home the point. “It would be very pro-ESG to raise your employees’ salaries by 500 percent,” he says. “But the stock price is going to drop significantly. No investor is going to like that.”
Watts and his co-authors also compared how much activity takes place around ESG-related news events compared to more traditional financial disclosures; overall, they found that investors respond more to ESG news than to analyst forecasts and dividend announcements but less than they do to earnings announcements or management guidance.
In other words, investors treat ESG information like they do any other information that might affect their returns. Quoting Alex Edmans of the London Business School, the authors write that “ESG is both extremely important and nothing special.”
They conclude that bans on considering ESG may be “misguided” and “violate fiduciary obligations.” But making broad claims that many retail investors care about ESG for nonfinancial reasons also “may be inadvisable.”
Watts says that politicization of ESG has led to unnecessarily contentious debates in state legislatures and among financial regulators.
“The term ESG has become weaponized,” he said. “If we just accepted that this stuff is not very special, we wouldn’t have a lot of these debates.”
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