The ESG stopping effect: Do investor reactions differ across the lifespan of ESG initiatives?

Abstract

In general, investors respond favorably to firms’ ongoing ESG initiatives. In a series of experiments, we examine whether their reactions differ across ESG initiatives’ lifespan. In particular, we predict and find evidence of an “ESG stopping effect.” Even when investors react similarly to the launch of new initiatives that are ESG-related versus non-ESG-related (i.e., general business initiatives), they react more negatively to companies stopping ESG initiatives compared to stopping general business initiatives. We further show that this more pronounced negative response to stopping ESG initiatives stems from investors’ sensitivity to, and feelings of responsibility for, the undesirable ethical considerations inherent to stopping ESG initiatives. That is, ethical considerations related to a firm’s initiatives loom larger for investors’ judgments when initiatives are stopped compared to when they are started. Finally, we find that the ESG stopping effect is exacerbated when ESG initiatives are relatively more effective, and are reduced but not eliminated when firms provide financial justification for ending an ESG initiative.

Keywords: ESG, lifecycle, ethicality, investor judgment and decision-making