‘Ethical’ share investors sell too quickly after bad news

Shareholders definitely flee companies that act unethically. But jumping off a little bit later could save their investment.

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A new study has found stock investors concerned with ethical issues ‘overreact’ in protest.

AMP Limited (ASX: AMP) and Rio Tinto Limited (ASX: RIO) have recently hit the headlines for negative environmental, social and governance (ESG) issues.

A Monash University study found investors and fund managers who wanted to sell the shares in protest would have been better off waiting 90 days after a scandal.

Monash Business School researcher, Dr Bei Cui, said there is definitely a pattern of sell-offs after a company is rocked by an ESG crisis. She commented, “The research findings show traders have an opportunity to buy these stocks at a discount and then sell at a profit. It also suggests that investors wishing to reduce exposure following bad ESG news can sometimes be better off waiting, in some cases up to 90 days after the announcement — to execute the necessary trades at a better price.”

The research analysed more than 331,000 ESG events over 19 years and their impact on the share prices of large and mid-cap companies.

A sudden drop in a company’s share price does have a protest impact. 

But the Monash study guides investors who want to both minimise their financial loss and eliminate exposure to an unethical company.

Local companies under fire

AMP has been rocked by a series of scandals extending back two years, including fee-for-no-service, the financial services Royal Commission and several sexual harassment cases.

Rio Tinto has been criticised this year for blowing up the Juukan Gorge site in Western Australia, despite protests from archaeologists and Indigenous groups about its cultural significance.

This week the mining giant announced some of its executive bonuses would be cut as a result, but that action and its internal report was panned as insufficient.

“The report from the Rio Tinto board review does not deliver any meaningful accountability for the destruction of some of the most significant cultural sites in Australia,” said Australian Council of Superannuation Investors Chief Executive, Louise Davidson. “The company should explain why greater accountability was not applied in light of this disaster,” she added.

Dr Cui’s research also found a company’s share price often starts trending up or down several days before the actual ESG event, suggesting information leaks are at play.

What about good ESG?

The good news is that companies that announce positive ESG news underperform the market afterwards. This means bargains could be snapped up by ethical investors.

Australia and New Zealand shareholders lead the way in supporting ESG, with 63.2% of capital invested in ethical companies.

According to Monash, this is a higher percentage than in Europe, the United States, Japan and Canada.

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