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

Abstract

This study explores the relationship between Environmental, Social, and Governance (ESG) practices and the market value of companies, with a focus on Brazil’s largest corporations. Recognizing the limitations of existing research tools for analyzing the impact of ESG factors, we introduce an innovative, open-source Dictionary of ESG Terms. This tool is designed to classify news content into the detailed categories established by the Sustainability Accounting Standards Board (SASB), thereby facilitating a nuanced analysis of ESG-related news and its subsequent effects on stock prices. Our analysis reveals that stock prices exhibit significant positive reactions to favorable ESG news and negative reactions to adverse ESG developments. Crucially, our findings underscore the discernment of investors, who appear to prioritize financially material ESG information over news bearing solely reputational or non-pecuniary significance. This distinction highlights the critical role of financial materiality in shaping market responses to ESG news. By providing empirical evidence from the Brazilian market, this study contributes to the broader discourse on ESG factors in corporate valuation. It offers practical tools and insights for investors, companies, and regulators aiming to better understand the complexities of ESG investment strategies. Through the application of our comprehensive ESG Dictionary, we shed light on the diverse dimensions of ESG impact, suggesting an approach to evaluate how ESG practices influence corporate market value in emerging economies.