Yale Insights: The Impact of ESG News on Investors

Overview

Investors are increasingly attentive to ESG (Environmental, Social, and Governance) news, but primarily when it impacts financial returns. A recent study from Yale School of Management reveals that retail investors' trading behavior is significantly influenced by ESG-related news events.

Environmental, Social, and Governance (ESG) factors have become a focal point in the investment world. A new study co-authored by Yale School of Management Professor Edward Watts delves into how retail investors react to ESG news and what drives their decisions.

The Study

The research analyzed the behavior of retail investors around more than 54,000 ESG-related news events for nearly 3,300 publicly traded firms between 2015 and 2022. The findings are telling: retail trading increases by 6% on ESG news days compared to non-event days, and by 8% post-2020.

Financial Motivations

The study aimed to determine whether investors are motivated by non-pecuniary reasons, such as social responsibility, or by the potential financial impact of the news. The evidence points to the latter. Investors tend to buy securities when the news suggests positive implications for stock performance and sell when the news is negative.

Case Examples

For instance, following the settlement of Boeing's 737 Max scandal, a negative ESG event, there was a 4% selloff in Boeing stock. Conversely, when Occidental Petroleum announced increased investments in clean energy, a positive ESG event, there was also a selloff due to a coinciding drop in stock price.

Implications for Pension Funds

The study's findings suggest that if retail investors are already trading based on ESG factors for financial reasons, pension funds might also consider incorporating ESG factors into their investment decisions. This insight is particularly relevant given the ongoing debate about the role of ESG in public pension fund investments.

The study underscores that while ESG factors are crucial, their impact on financial returns is what ultimately drives investor behavior. As ESG considerations continue to shape the investment landscape, understanding these motivations can help investors and policymakers make more informed decisions.

Source:

https://insights.som.yale.edu/insights/investors-care-about-esg-related-news-when-it-impacts-returns