ON THE ECONOMIC RELEVANCE OF ESG BAD NEWS AND CLIMATE CHANGE-INDUCED FINANCIAL RISK DISCLOSURES

Abstract

This thesis consists of three papers on the economic relevance of ESG news and climate change-induced financial risk disclosures using US firms’ data. In sum, this thesis contributes to the literature about the value relevance of ESG-related information and helps investors and policymakers better understand the economic consequences of climate change-induced financial risk disclosures. The first paper investigates the relationship between negative ESG media coverage, media reach, whether the firm is in a controversial industry or not, ESG performance, and the stock market reaction to negative ESG news. Specifically, I first ask whether negative ESG news coverage from media outlets of different media influence affect firms’ values differently - does the level of media reach affect the stock price reaction to the news. I then develop this by asking whether the degree of media influence on stock prices affects different types of firms differently. The findings are as follows. First, the media reach level is negatively related to abnormal returns when negative ESG news occurs. Secondly, for firms in controversial industries with low ESG performance, the level of the media reach is negatively related to abnormal returns, and this negative association is more pronounced than that for firms in non-controversial industries with low ESG performance. Thirdly, the difference of the impact of media reach between controversial industry firms with low ESG performance and controversial industry firms with high ESG performance is positive and significant. There is also some evidence that high ESG performance overall provides insurance against negative ESG news when the news is covered in media of the highest reach. Overall, these results suggest that the stock market does not generally believe that high ESG performance for controversial industry firms signifies greenwashing, and that there is an insurance effect against the media reach impact on stock prices caused by negative ESG news events. The second paper examines the impact of corporate governance attributes on the likelihood and extent of climate change-induced financial risk disclosures made by US firms through SEC filings, using a sample of 4993 US-domiciled firm-years for the period from 2010 to 2017 that feature (or do not feature) disclosures about climate change-induced financial risk made according to general disclosure principles for the reporting of material risks under SEC Regulation S-K. The corporate governance attributes considered in this study include environmental disclosures, prior climate change-induced financial risk disclosures, strategic ownership, analyst following and board independence. I find that environmental disclosures are positively associated with the likelihood of firms initiating and maintaining the disclosure of information on climate change-induced financial risk, and its extent. Also, board independence is positively related to the extent of climate change-induced financial risk disclosures for the firms shifting from no disclosures last year to some disclosures this year. This research contributes to the emerging literature about climate change-induced financial risk by better understanding the factors driving such disclosures. The third essay examines the market consequences of US firms' climate change-induced financial risk disclosures through SEC filings from 2009 to 2017. Specifically, this paper examines the association between climate change-induced financial risk disclosures and the firm’s information environment, as captured by analyst following and uncertainty. I find that higher levels of climate change-induced financial risk disclosures are associated with more analysts following firms. One explanation could be that climate change-induced financial risk disclosures are unreliable, increasing the uncertainty of the firms’ information environment. Another explanation could be that the climate change-induced financial risk disclosure

Date of Award	1 Aug 2023
Original language	English
Awarding Institution	The University of Manchester
Supervisor	Andrew Stark (Supervisor) & Wei Jiang (Supervisor)