Shareholders and the environment: a review of four decades of academic research

Abstract

We provide a synthesis of four decades of empirical research regarding the reaction of shareholders to environmental events. This literature is at the crossroads of finance, environmental economics, management and corporate social responsibility (CSR). To set the stage, we first provide an account of the Brumadinho ecological disaster that occurred in Brazil on January 25th, 2019. Second, we provide a critical review of more than 100 event studies. These papers cover a diverse set of events, such as industrial accidents, public disclosure programs, legal actions following environmental violations, changes in environmental regulation, environmental news, and corporate initiatives. This review makes four contributions. First is the synthesis of a large strand of literature in a structured setting, so as to be readily handled by both experts and non-experts. Second is the observation that stock market penalties in the event of environmental concerns are likely to be quite low: on average there is a (temporary) drop in the excess stock market return to events that are harmful to the environment of about 2% and the median is −0.6%. Third is to highlight the limits of CSR as a business strategy towards a sustainable society. Fourth is to provide an open access bibliographic database.

Does non‐compliance pay? Environmental violations and share prices in China

“…However, this is a small market effect compared to other relevant studies. Capelle‐Blancard et al (2021) have reviewed empirical research over 40 years on shareholders' responses to environmental events. They summarize that there is a transitory reduction of almost 2% on average in the abnormal stock market return due to events that are harmful to the environment, with a median decline of 0.6%.…”

“…There might be two major reasons. Most intuitively, punishments of large fines, production suspensions, or those issued by high‐level governments, directly affect the profitability of companies in a considerable way, harming shareholders' wealth (Capelle‐Blancard et al, 2021). In addition, from the perspective of signaling, these violations are more likely to get exposed, either via self‐disclosure by listed companies or via passive disclosure by the media, lowering the cost for shareholders and investors to access information (Kuo et al, 2012; Xia et al, 2023).…”

“…Examples of the manifestations include investor withdrawals, customer boycotts (Krishna & Kim, 2022), and reputation loss (Capelle‐Blancard & Laguna, 2010). In recent years, investors' interest in a company's environmental performance has grown, and the stock market may increasingly reflect this interest (Bhattacharyya & Cummings, 2015; Bouzzine, 2021; Capelle‐Blancard et al, 2021).…”

Stock Price Reaction to Environmental, Social, and Governance News: Evidence from Brazil and Financial Materiality

“…Extreme ESG events, like toxic substance leaks, racism scandals, and accounting fraud, have a negative effect on the market value of a company. This is well known in the academic literature [4]. However, such studies have limitations: they focus on a few events and do not consider the ordinary daily operations of companies that may employ ESG practices, thereby ignoring investor reactions to such practices [5].…”

Industrial accidents: The mediating effect of corporate social responsibility and environmental policy measures

“…As such, a firm's social and environmental performance may directly impact their financial and economic performance following an industrial disaster, ultimately reducing the generally observed selling pressure observed at the public disclosure of these events (Davidson & Stevens, 2013). Documenting if and how corporate social and environmental performance affects stock market reaction in the aftermath of a tail event-an industrial disaster-is central to the debate (see for a recent literature review: Bouzzine, 2021;Capelle-Blancard et al, 2021) on how corporate policies and market forces may supplement eventual environmental regulatory weakness (Dasgupta et al, 2001;Karpoff et al, 2005). In this article, we aim to determine the extent that the firm's CSP may directly impact the financial performance of firms at the onset of an industrial accident, indirectly addressing a fundamental and still open question in extant literature: the extent to which the stock market can incentivize companies to adopt better environmental behavior.…”