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Stock performance study shows companies should take environmental and social factors seriously

Stock performance study shows companies should take environmental and social factors seriously

2/7/2020 3:28:00 PM

Stock performance study shows companies should take environmental and social factors seriously

Societe Generale studied the impact on companies following an ESG high controversy event, finding that stocks typically underperformed by 12% over the following two years.

7:26 AM EST@PippaStevens13Key PointsSociete Generale looked at the impact of "high ESG controversy" events on stock performance, and found that two thirds of the time shares underperformed the broader market by an average of 12% over the subsequent 2 years.

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"A controversy event will halt the rise in a stock price, and for a sustained period: a solid two years ... Prior to the high controversy occurring, these companies were typically performing in line with the market," analysts led by Charles de Boissezon said.

The firm identified 12 companies that have recently experienced "high ESG controversy events," including Wells Fargo, Chevron, Vale, Boston Scientific and Boeing.As theESG and sustainable investing movementgrows, Societe Generale quantified the potentially large consequences for companies that don't follow suit. headtopics.com

The firm found that in two thirds of "high ESG controversy" cases a company's stock experienced "sustained underperformance," trailing the global index by an average of 12% over the course of the following 2 years.The firm defined a "controversy" as "when a company's activity has unintended and/or undesired negative environmental and/or social effects on stakeholders, with corresponding reputational risk," adding that it's the "extreme ESG downside risk, with at times a massively negative impact on company share prices."

Traders on the floor of the New York Stock ExchangeBrendan McDermid | ReutersThe firm based its analysis on 80 past ESG controversies, dating back to 2005 and spanning regions and sectors."A controversy event will halt the rise in a stock price, and for a sustained period: a solid two years ... Prior to the high controversy occurring, these companies were typically performing in line with the market," analysts led by Charles de Boissezon said.

In addition to underperforming theMSCI World Indexby 12%, the stocks typically lagged their regional sector by 4%.The firm noted that a stock's drop can contribute significantly to the performance of its regional sector, which is why the underperformance relative to the global benchmark was more extreme.

ESG investing strategies grew to more than $30 trillion in 2018, according toGlobal Sustainable Investment Alliance, and that number is set to keep rising as consumer tastes shift and investors demand more transparency. By many accounts, companies can no longer afford to ignore these factors. headtopics.com

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Sustainable investing was a key theme at this year's World Economic Forum in Davos, with a number of world leaders and CEOs stressing the urgency of the climate crisis."All investors are saying, 'I want you to invest in companies doing right by society,'"

. "We have $25 billion in ESG funds, and more is going there."This followsthat the climate crisis is about to trigger "a fundamental reshaping of finance" as issues like climate change "become a defining factor in companies' long-term prospects."

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