Research Insights: ESG Scores, Scandal Risk, and Market Reactions
A study published in Financial Innovation by Prof. Wenzhi Ding from the School of Accounting and Finance (AF) at The Hong Kong Polytechnic University (PolyU)—titled "ESG scores, scandal probability, and event returns"—explores the informational value of ESG scores and their practical impacts on firms.
Against the backdrop of the rapid global development of ESG investing, this study further delves into this critical issue, meeting the in-depth research needs of academia and the industry. While prior relevant research has not fully analyzed how ESG scores specifically act on corporate risks and market reactions, this study fills the refined research gap in this field through theoretical modeling and large-scale empirical analysis.
ESG data includes ratings from four global rating agencies(KLD, ASSET4, Sustainalytics and S&P Global), as well as composite scores (average and principal component analysis) and "ESG disagreement" (divergences among rating agencies). ESG scandals are identified through RepRisk’s event-driven database (over 100,000 public sources). For market returns, robust empirical methods employed to analyze the cumulative abnormal returns (CAR) around scandal events.
Key Empirical Findings
Higher ESG scores reduce scandal riskFirms with stronger ESG ratings have a statistically significant lower probability of experiencing ESG scandals. A one-standard-deviation increase in ESG scores is associated with a 0.1–1.1% reduction in scandal likelihood over 12 months, consistent across most rating metrics.
Scandals trigger negative returns—worse for high-ESG firms. Stronger ESG ratings correlate with more negative returns, as scandals signal potential overestimation of a firm’s true ESG profile.
ESG rating disagreement amplifies losses. Greater divergence in ESG scores across providers increases the market’s negative reaction to scandals, reflecting heightened investor uncertainty about a firm’s actual ESG performance.
ESG scores are informative despite heterogeneity. ESG scores consistently predict scandal risk and event returns—validating their practical value.
Theoretical & Practical Implications
For firms: Optimal ESG investment depends on a trade-off between scandal losses and ESG adjustment costs. Low-ESG firms may rationally maintain lower ratings if improvement costs exceed potential scandal losses, while high-ESG firms must uphold strict standards to avoid severe market penalties.
For investors: ESG scores offer actionable downside risk insights—use them to assess scandal likelihood and loss severity, and account for rating disagreement as a proxy for uncertainty.
For policymakers: Reducing ESG investment costs (e.g., targeted incentives) and fostering market ESG awareness can promote broader corporate sustainability engagement.
Keywords: ESG score performance, ESG scandal, ESG adjustment cost
Research Paper: Sun, W., Luo, Y., Yiu, SM. et al. ESG scores, scandal probability, and event returns. Financ Innov 10, 121 (2024).
👉 Read the full article here: https://doi.org/10.1186/s40854-024-00635-1
Against the backdrop of the rapid global development of ESG investing, this study further delves into this critical issue, meeting the in-depth research needs of academia and the industry. While prior relevant research has not fully analyzed how ESG scores specifically act on corporate risks and market reactions, this study fills the refined research gap in this field through theoretical modeling and large-scale empirical analysis.
ESG data includes ratings from four global rating agencies(KLD, ASSET4, Sustainalytics and S&P Global), as well as composite scores (average and principal component analysis) and "ESG disagreement" (divergences among rating agencies). ESG scandals are identified through RepRisk’s event-driven database (over 100,000 public sources). For market returns, robust empirical methods employed to analyze the cumulative abnormal returns (CAR) around scandal events.
Key Empirical Findings
Higher ESG scores reduce scandal riskFirms with stronger ESG ratings have a statistically significant lower probability of experiencing ESG scandals. A one-standard-deviation increase in ESG scores is associated with a 0.1–1.1% reduction in scandal likelihood over 12 months, consistent across most rating metrics.
Scandals trigger negative returns—worse for high-ESG firms. Stronger ESG ratings correlate with more negative returns, as scandals signal potential overestimation of a firm’s true ESG profile.
ESG rating disagreement amplifies losses. Greater divergence in ESG scores across providers increases the market’s negative reaction to scandals, reflecting heightened investor uncertainty about a firm’s actual ESG performance.
ESG scores are informative despite heterogeneity. ESG scores consistently predict scandal risk and event returns—validating their practical value.
Theoretical & Practical Implications
For firms: Optimal ESG investment depends on a trade-off between scandal losses and ESG adjustment costs. Low-ESG firms may rationally maintain lower ratings if improvement costs exceed potential scandal losses, while high-ESG firms must uphold strict standards to avoid severe market penalties.
For investors: ESG scores offer actionable downside risk insights—use them to assess scandal likelihood and loss severity, and account for rating disagreement as a proxy for uncertainty.
For policymakers: Reducing ESG investment costs (e.g., targeted incentives) and fostering market ESG awareness can promote broader corporate sustainability engagement.
Keywords: ESG score performance, ESG scandal, ESG adjustment cost
Research Paper: Sun, W., Luo, Y., Yiu, SM. et al. ESG scores, scandal probability, and event returns. Financ Innov 10, 121 (2024).
👉 Read the full article here: https://doi.org/10.1186/s40854-024-00635-1
研究洞察：ESG評分、醜聞風險與市場反應
香港理工大學會計及金融學院的丁文智教授在Financial Innovation上發表了一篇題為《ESG scores, scandal probability, and event returns》的研究報告。
在 ESG 投資全球快速發展的背景下，該研究進一步聚焦 ESG 評分的資訊價值及其對企業的實際影響，深入回應了學界與業界對這一關鍵議題的探索需求 —— 此前相關研究尚未充分剖析 ESG 評分如何具體作用於企業風險與市場反應，而本研究通過理論建模與大數據實證，填補了這一領域的細化研究缺口。
ESG數據來自四家全球評級機構的評級，以及綜合評分（主成分分析）和「ESG分歧」（評級機構之間的差異）。ESG醜聞是透過RepRisk的事件驅動型資料庫識別。市場報酬则採用穩健的實證方法分析醜聞事件前後累計異常報酬 (CAR)。
關鍵實證發現
較高的 ESG 評分降低醜聞風險。ESG 評級較高的公司發生 ESG 醜聞的機率顯著降低。 ESG 評分每提高一個標準差，12 個月內發生醜聞的可能性就會降低 0.1% 至 1.1%，這一結果在大多數評級指標中均保持一致。
醜聞導致負收益－高 ESG 公司損失更大。更高的 ESG 評級與更大的負收益相關，因為醜聞表明可能高估了公司的真實 ESG 狀況。
ESG評級差異加劇損失。不同評級機構ESG評分的差異越大，市場對醜聞的負面反應就越強烈，反映出投資人對公司實際ESG表現的不確定性增加。
儘管評級機構之間存在差異，但ESG評分仍具有參考價值。ESG評分能夠持續預測醜聞風險和事件收益，從而驗證了其實際價值。
理論與實務意義
對公司而言：最優的ESG投資取決於醜聞損失與ESG調整成本之間的權衡。如果改進成本超過潛在的醜聞損失，低ESG公司可以理性地維持較低的評級；而高ESG公司則必須堅持嚴格的標準，以避免受到嚴厲的市場懲罰。
對投資者而言：ESG評分能夠提供可操作的下行風險洞察——利用這些評分評估醜聞發生的可能性和損失的嚴重程度，並將評級差異作為不確定性的指標。
對於政策制定者：降低 ESG 投資成本（例如，有針對性的激勵措施）並提高市場 ESG 意識可以促進更廣泛的企業永續參與。
關鍵詞: ESG评分表现、ESG丑闻、ESG调整成本；
研究論文（只限英文版）：Sun, W., Luo, Y., Yiu, SM. et al. ESG scores, scandal probability, and event returns. Financ Innov 10, 121 (2024).
👉 閱讀完整文章：https://doi.org/10.1186/s40854-024-00635-1
在 ESG 投資全球快速發展的背景下，該研究進一步聚焦 ESG 評分的資訊價值及其對企業的實際影響，深入回應了學界與業界對這一關鍵議題的探索需求 —— 此前相關研究尚未充分剖析 ESG 評分如何具體作用於企業風險與市場反應，而本研究通過理論建模與大數據實證，填補了這一領域的細化研究缺口。
ESG數據來自四家全球評級機構的評級，以及綜合評分（主成分分析）和「ESG分歧」（評級機構之間的差異）。ESG醜聞是透過RepRisk的事件驅動型資料庫識別。市場報酬则採用穩健的實證方法分析醜聞事件前後累計異常報酬 (CAR)。
關鍵實證發現
較高的 ESG 評分降低醜聞風險。ESG 評級較高的公司發生 ESG 醜聞的機率顯著降低。 ESG 評分每提高一個標準差，12 個月內發生醜聞的可能性就會降低 0.1% 至 1.1%，這一結果在大多數評級指標中均保持一致。
醜聞導致負收益－高 ESG 公司損失更大。更高的 ESG 評級與更大的負收益相關，因為醜聞表明可能高估了公司的真實 ESG 狀況。
ESG評級差異加劇損失。不同評級機構ESG評分的差異越大，市場對醜聞的負面反應就越強烈，反映出投資人對公司實際ESG表現的不確定性增加。
儘管評級機構之間存在差異，但ESG評分仍具有參考價值。ESG評分能夠持續預測醜聞風險和事件收益，從而驗證了其實際價值。
理論與實務意義
對公司而言：最優的ESG投資取決於醜聞損失與ESG調整成本之間的權衡。如果改進成本超過潛在的醜聞損失，低ESG公司可以理性地維持較低的評級；而高ESG公司則必須堅持嚴格的標準，以避免受到嚴厲的市場懲罰。
對投資者而言：ESG評分能夠提供可操作的下行風險洞察——利用這些評分評估醜聞發生的可能性和損失的嚴重程度，並將評級差異作為不確定性的指標。
對於政策制定者：降低 ESG 投資成本（例如，有針對性的激勵措施）並提高市場 ESG 意識可以促進更廣泛的企業永續參與。
關鍵詞: ESG评分表现、ESG丑闻、ESG调整成本；
研究論文（只限英文版）：Sun, W., Luo, Y., Yiu, SM. et al. ESG scores, scandal probability, and event returns. Financ Innov 10, 121 (2024).
👉 閱讀完整文章：https://doi.org/10.1186/s40854-024-00635-1
Assistant Professor
