A Pitfall in Ethical Investing: ESG Disclosures Reflect Vulnerabilities, not Virtues

Volume 15, Number 2, 2017
Gerald T. Garvey, Joshua Kazdin, Ryan LaFond, Joanna Nash and Hussein Safa

It is widely believed that ESG (Environmental, Social, Governance) investing reduces regulatory and reputational risks. In a large global panel, we find that business ethics controversies and regulatory issues are more likely for firms that disclose a richer set of ESG-friendly policies. The effect is attenuated by controlling for size, industry, and country but remains economically and statistically significant. We also show that some prominent ESG indices favor companies that disclose more ESG policies and as a consequence have greater controversy exposure than an ESG-unaware benchmark.