ESG Reputation Risk Matters: An Event Study Based on Social Media Data

TL;DR

This study analyzes how social media activity related to ESG risks influences shareholder returns, revealing that ESG-risk spikes on social media lead to significant negative abnormal returns, especially in Social and Governance areas.

Contribution

First to distinguish social media ESG discussions from traditional controversy news, quantifying their impact on stock returns using a large-scale tweet dataset.

Findings

ESG-risk events cause a 0.29% decline in abnormal returns

Social and Governance categories drive most of the impact

Social media sentiment significantly influences shareholder perception

Abstract

We investigate the response of shareholders to Environmental, Social, and Governance-related reputational risk (ESG-risk), focusing exclusively on the impact of social media. Using a dataset of 114 million tweets about firms listed on the S&P100 index between 2016 and 2022, we extract conversations discussing ESG matters. In an event study design, we define events as unusual spikes in message posting activity linked to ESG-risk, and we then examine the corresponding changes in the returns of related assets. By focusing on social media, we gain insight into public opinion and investor sentiment, an aspect not captured through ESG controversies news alone. To the best of our knowledge, our approach is the first to distinctly separate the reputational impact on social media from the physical costs associated with negative ESG controversy news. Our results show that the occurrence of an ESG-risk event leads to a statistically significant average reduction of 0.29% in abnormal returns. Furthermore, our study suggests this effect is predominantly driven by Social and Governance categories, along with the "Environmental Opportunities" subcategory. Our research highlights the considerable impact of social media on financial markets, particularly in shaping shareholders' perception of ESG reputation. We formulate several policy implications based on our findings.