Environment, social and governance (ESG)-related controversies can impact stock performance between 2% for minor misdemeanours and up to 5% for more severe incidents after six months, according to analysis from Clarity AI.
The global sustainability technology platform tested the hypothesis that involvement in ESG controversies is a valid predictor of corporate medium-term value loss.
The analysis covered over 10,000 controversial incidents for more than 1,500 corporations spanning a four year period.
Classifications were broken down into low, medium, and high, and were calculated by the increase in the ESG-derived risks for the company as estimated by Clarity AI’s models.
The models consider the magnitude of the issue, its impact on stakeholders, and the management by the company. as well as the type of incident and industry.
The analysis found 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,” Clarity AI said.
It added that 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.”
“Understanding the risks associated with corporate controversies and taking appropriate actions when controversies do occur can help investors build stronger-performing portfolios and help companies react appropriately to minimise market value loss and maintain investor confidence,” said Borja Cadenato, director of product at Clarity AI.
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