Sell-Side Analysts’ Assessment of ESG Risk

65 Pages Posted: 20 Sep 2022 Last revised: 12 Aug 2023

See all articles by Min Park

Min Park

University of Kansas - Accounting and Information Systems Area

Aaron Yoon

Northwestern University - Department of Accounting Information & Management

Tzachi Zach

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Date Written: September 7, 2022

Abstract

We assess whether and how financial analysts incorporate information about ESG risks. Using a
unique dataset on firm-day level negative ESG incidents, we find that analysts’ outputs, such as
stock recommendations, EPS forecasts, and target prices are associated with negative future ESG
risk events that are financially material. Further investigation suggests that analysts incorporate
ESG risks not only through adjusting future cash flow expectations (a “numerator channel”), but
also through adjustments to discount rates (a “denominator channel”). We supplement this large
sample evidence with a detailed analysis of a single brokerage house’s scenario-based valuations
and its own ESG ratings, and find that there is an association between ESG risk assessments and
general risk assessments. Overall, our results are consistent with analysts viewing at least some
aspects of ESG risks as systematic, and highlight the ability of financial analysts to synthesize and
integrate ESG risks into their research.

Keywords: Analysts; ESG; Negative Incidents; Operational Risks

Suggested Citation

Park, Min and Yoon, Aaron and Zach, Tzachi, Sell-Side Analysts’ Assessment of ESG Risk (September 7, 2022). Available at SSRN: https://ssrn.com/abstract=4211968 or http://dx.doi.org/10.2139/ssrn.4211968

Min Park

University of Kansas - Accounting and Information Systems Area ( email )

1654 Naismith Drive
Lawrence, KS 66045
United States

Aaron Yoon (Contact Author)

Northwestern University - Department of Accounting Information & Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Tzachi Zach

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States
614-292-4101 (Phone)

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