Is ESG’s Market Impact Fading? Stock Price Reactions to ESG News Over Time

Abstract

We examine how the stock market's reaction to environmental, social, and governance (ESG) news has evolved since 2000. To do so, we develop a systematic, firm-level event-detection framework that identifies ESG shocks from media sentiment and attention data. Using these events, we document a pronounced inverted U-shaped pattern in market responses over time. In the early 2000s, the market penalized both positive and negative ESG news, consistent with ESG initiatives being perceived as agency costs at that time. From the late 2000s to the mid-2010s, market reactions aligned with news polarity, with positive ESG news rewarded and negative news penalized. By the late 2010s, however, the impact of positive ESG news weakened substantially, while negative news elicited strong market penalties. These patterns are robust across ESG pillars, industries, and firm characteristics, with small firms more responsive to positive news and large firms more sensitive to negative news. Our findings help reconcile previously conflicting evidence by showing that the market impact of ESG news is fundamentally time-varying.

Keywords: ESG, Event Study, Event Detection, Asset Prices, ESG Sentiment, News

JEL Classification: G12, G30, Q51, Q56