This paper studies the effect of ESG risks on shareholder value, using data from RepRisk to measure the risk exposure of a firm to ESG incidents. A firm has high ESG risks when it had many ESG incidents in the past.

This paper shows that a portfolio of these firms generates negative stock returns over the long-run, even when controlling for risk factors, industries, or firm characteristics. A negative correlation between ESG risks and stock returns gives evidence that weak CSR destroys firm value by increasing the risk of an ESG incident.

This finding contributes to a large debate on whether CSR is beneficial to shareholder value, because it provides empirical support for the often-claimed hypothesis of “doing well by doing good”. Doing well by doing good holds in the sense that doing bad destroys shareholder value.

Negative abnormal stock returns on ESG risks imply that markets do not fully incorporate the negative consequences of intangible risks into stock valuations. Thereby, this finding is also related to the literature on markets mispricing intangibles. A substantial literature finds evidence that markets underestimate the value of intangible assets. Under a mispricing channel, an intangible only affects stock returns when it manifests in tangible outcomes such as higher earnings announcements.

This paper contributes that markets do not only misprice the value of intangible assets, but also underestimate the negative consequences of intangible risks such as ESG risks. Finally, the third contribution is a profitable SRI trading strategy. By shorting firms with a notable history of ESG incidents, socially responsible investors can put pressure on these firms to improve their CSR standards and earn positive abnormal stock returns. This contrast prior findings in the literature that SRI has a zero or even a negative effect on the investment performance.


By: Simon Gloßner, Catholic University of Eichstaett-Ingolstadt

See the entire SSRN paper here