Is ESG performance a protective umbrella for ESG violations?

Hongrui Chai, Zhenhao Cheng and Weixing Wu

International Review of Financial Analysis, 2025, vol. 98, issue C

Abstract: We investigate whether environmental, social, and governance (ESG) performance acts as an umbrella protecting stock prices from ESG violations. Using ESG violation events from 2009 to 2022 in China, we find that the listed companies with high ESG performance exhibit lower cumulative abnormal returns during the event window. Further, the negative relation between ESG performance and market reaction during ESG violations is moderated by the motivation of ESG practices and the risk of greenwashing. Specifically, compared with the firms that view ESG development as a long-term goal, the negative relationship between ESG performance and market reaction is stronger for firms treating ESG as a short-term profitability tool. Companies with high greenwashing risk demonstrate an intensified negative relationship between ESG performance and market reaction during violations.

Keywords: ESG performance; ESG violation events; Greenwashing risk; Short-termism motivation; Market reaction (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:98:y:2025:i:c:s1057521924007907

DOI: 10.1016/j.irfa.2024.103858

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