There is no doubt that the widespread investor interest in sustainable investing is good for society, but is it beneficial for investors? Our research shows there is no real return difference for companies subject to either high or low ESG controversy risk. However, companies with improving ESG credentials tend to achieve higher returns than companies with deteriorating ESG credentials. What therefore matters for future performance is the dynamics of the firm’s ESG risk exposure.

Trust what you can see

Controversies measure a firm's reputational risk related to ESG issues (e.g. lawsuits, fatalities, etc.) and can be viewed as the direct consequence of a firm’s inability to properly integrate ESG into its corporate strategy. If investors view this inability as a factor that can jeopardise a firm's prospects, firms that are experiencing severe controversies ("sinners") will likely under-perform those that are experiencing either little or no controversies ("angels"). There is one particular advantage of using controversies rather than ESG ratings for this type of assessment: public controversies don't solely rely on information released by the firm, thus mitigating the impact of “greenwashing”. 

The RepRisk Index (RRI) dynamically quantifies firms’ reputational exposures to ESG and business conduct risks. It relies on a natural language processing algorithm to quantify the impact of ESG issues on a firm's reputational risk by screening over 90,000 external sources of information (print media, social media, etc.) in 20 different languages. 

We use three distinct indicators to quantify reputational risk: The RepRisk index (RRI), its one month change and its three months change.