Beyond borders: Asset price reaction to ESG incidents at home and abroad

Abstract

This study addresses the growing interest among investors and academics in understanding the asset price reaction to Environmental, Social, and Governance (ESG) incidents, particularly those occurring internationally. Despite extensive literature on ESG-related financial implications, the joint impact on stocks and corporate bonds, especially in relation to geographic, linguistic, and economic contexts of incidents, remains understudied. To bridge this gap, we apply an event-study methodology utilizing the Fama–French five-factor model for equities and matching portfolios based on credit ratings and durations for corporate bonds. Analyzing a global dataset of ESG incidents, we uncover several important insights. First, environmental incidents are generally associated with a downward movement in both stocks and corporate bonds. In Europe, governance-related news also triggers a pronounced negative reaction. Second, ESG incidents occurring within the home jurisdiction in the US and Europe often lead to a price increase or a milder drop, highlighting a differential market response based on geographical proximity. Third, we observe that incidents reported in non-English languages or occurring farther from the corporate headquarters tend to elicit stronger negative market reactions, especially when these incidents take place in developed countries within the Asia-Pacific region. Finally, incidents in wealthier countries with higher GDP per capita result in a greater price drop across all assets, whereas bond prices exhibit a smaller decline or even increase when incidents occur in developing countries. These findings underscore the nuanced ways in which geographical, linguistic, and economic factors shape market responses to global ESG events.