ESG and Scandal Risk: How Can Investors Make Smarter Choices?

GA, UNITED STATES, January 9, 2025 /EINPresswire.com/ -- A recent study by an international research team unveils the intricate relationship between ESG scores and corporate scandal risks. While companies with high environmental, social, and governance (ESG) scores often excel in sustainability, the financial repercussions can be more severe when scandals occur. These findings offer investors a fresh perspective for evaluating risks and returns, empowering them to make smarter decisions.

A study (DOI: 10.1186/s40854-024-00635-1) conducted by researchers from The University of Hong Kong, University College London, Xiamen University, and The Hong Kong Polytechnic University, published in Financial Innovation on July 22, 2024, explores the nuanced interplay between environmental, social, and governance (ESG) scores and corporate scandal risks. The study analyzed over 13,000 corporate events across 86 countries to provide a data-driven understanding of this dynamic.

“Our research reveals that while ESG scores can reflect a company’s commitment to sustainability, high scores might increase financial exposure during a reputational crisis,” the researchers explained. This finding challenges the traditional perception of high ESG scores as a shield against scandals.

Using advanced data analytics, the team discovered that companies with higher ESG scores tend to have a lower probability of scandals but face more significant market repercussions when such events occur. This suggests that heightened market expectations for high-ESG firms can exacerbate the financial impact of crises. The study's findings indicate that the perceived resilience of high ESG-rated companies might be an illusion in the face of scandals, as the market's reaction to their misconduct is particularly severe, reflecting a higher bar set for their behavior.

The findings hold significant implications for both investors and corporate leaders. Solely relying on ESG scores may not be sufficient for a comprehensive risk assessment when selecting investment targets or designing corporate strategies. The research team advises investors to integrate ESG metrics with other risk indicators to develop a multidimensional decision-making framework. This approach can help in identifying potential vulnerabilities that are not captured by ESG scores alone, providing a more holistic view of a company's risk profile.

By uncovering the intricate dynamics between ESG scores and scandal risks, this study offers practical tools for more precise risk management and investment strategies. It highlights the need for a deeper understanding of how ESG scores can predict corporate behavior and the market's response to it. This insight is crucial for investors looking to align their portfolios with sustainability goals while mitigating risk.

DOI
10.1186/s40854-024-00635-1

Original Source URL
https://doi.org/10.1186/s40854-024-00635-1

Funding information
The study was funded by Hong Kong Polytechnic University under grand number P0047740.

Lucy Wang
BioDesign Research
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