Bridge over ocean
26 February 2021 Financial Analysts Journal Volume 77, Issue 2

Risk Mitigation of Corporate Social Performance in US Class Action Lawsuits

  1. Daniel V. Fauser
  2. Sebastian Utz

This study finds that firms with high positive corporate social performance are less exposed to litigation risk — both in likelihood and impact.

We investigated the relationship between corporate environmental, social, and governance (ESG) performance and litigation risk by examining US class action lawsuits. We found that a 1 standard deviation improvement in the ESG controversies of an average company in the sample reduced litigation risk from 3.1% to 2.4%. Moreover, an average company with low ESG performance exhibited a loss in market value twice as large as that of a company with high ESG performance—an abnormal loss of US$1.14 billion. Implementation of our findings with a trading strategy yielded positive monthly alphas, suggesting that investors benefit from lower litigation risk and the insurance-like protection of high ESG performance.
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