Sell-Side Analysts’ Assessment of ESG Risk

Abstract

We assess whether and how financial analysts incorporate information about downside ESG risks. Using a unique dataset on firm-day level negative ESG incidents, we find that analysts’ outputs (i.e., stock recommendations, EPS forecasts, and target prices) are associated with negative future ESG risk events, especially those that are financially material. Further investigation suggests that analysts incorporate ESG risks not only through adjusting future cash flow expectations (i.e. the “numerator”), but also through adjusting discount rates (i.e., the “denominator”). Overall, our results highlight the ability of financial analysts to synthesize and integrate ESG risks into their research.

Keywords: ESG; sell-side analysts; ESG risk