Pollution crises, personnel controversies and corporate or political scandals cause stocks to underperform their benchmarks in the long-run versus stocks that avoid such calamities, according to researchers at Ossiam, a Paris-based asset management company.
The findings illustrate how ESG, or environmental, social and governance criteria, are increasingly important when measuring the risks and the growth of shares.
“Our results make a clear case for the potential benefits of excluding stocks with high controversy levels from investment universes,” the firm’s report states.
The report looks at how investors punish American and European public companies that stir controversy and compare their performance with competitors that don’t garner negative headlines. They did not include tobacco, defense and similar sectors where controversies are common.
Polluting, mistreating employees and executive malfeasance not only hurts the image of companies but also can lead to legal troubles and loss of business opportunities, the report found. Recovering from those troubles often takes much longer than suffering the damage from them.
The reverse was the case in the Asia-Pacific region, where stocks embroiled in controversies outperformed their benchmarks, though not as well as United States-based and European companies that avoided such problems.
The results could denote a lack of information or a tolerance for controversies in Asia. But the researchers said they had less information about companies in the region.