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The Impact of Negative ESG News on Firms’ Long-Term Performance

GSEM Professor Philipp Krüger, together with François Derrien, Augustin Landier, and Tianhao Yao, published an article in The Journal of Finance, a top tier publication.

The study explores how negative environmental, social, and governance (ESG) news affects firms’ earnings forecasts and valuations. Analysts significantly downgrade forecasts after ESG incidents, both in the short term and over longer horizons, mainly due to expected declines in future sales rather than higher costs.

These revisions explain most of the negative impact on stock prices, showing that integrating ESG concerns into financial analysis is rational and essential. Avoiding ESG incidents is therefore a key risk-management priority for companies. Avoiding negative ESG incidents emerges as a critical risk-management priority for companies.

ABSTRACT
We investigate the expected consequences of negative environmental, social, and governance (ESG) news on firms' future profits. After learning about negative ESG news, analysts significantly downgrade their forecasts at short and longer horizons. Negative ESG news affects forecasts more strongly at longer horizons than other types of negative corporate news. The negative revisions of earnings forecasts following negative ESG news largely reflect expectations of lower future sales, rather than higher future costs. Quantitatively, forecast revisions can explain most of the negative impacts of ESG news on firm value. Analysts are correct to revise forecasts downward following negative ESGÌýnews.

The study is available here:Ìý

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