Does ESG Negative Screening Work?

Abstract

We revisit the firm value and pricing implications of the negative screening of sin stocks. Unlike prior work, we find that institutional ownership and valuations related to sin stocks are not different from those of other stocks after controlling for differences in fundamentals between sin and non-sin stocks. Sin stocks do not differ in the likelihood of exiting the public market, the cost of raising new equity, and in the announcement returns around negative ESG news relative to non-sin stocks, casting further doubt on whether negative screening hurts sin stocks. However, the cost of new debt is higher for sin stocks. Investors submit more ESG proposals and a larger number of ESG proposals are passed. In sum, evidence for the oft-stated hypothesis that negative screening hurts sin stocks depends on the design the researcher uses.

Keywords: CSR, ESG, exclusion, index exclusion, negative screening, socially responsible investing, firm valuation, performance

JEL Classification: G11, G23, G31, G32, D71