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Is ESG performance a protective umbrella for ESG violations?

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  • Chai, Hongrui
  • Cheng, Zhenhao
  • Wu, Weixing

Abstract

We investigate whether environmental, social, and governance (ESG) performance acts as an umbrella protecting stock prices from ESG violations. Using ESG violation events from 2009 to 2022 in China, we find that the listed companies with high ESG performance exhibit lower cumulative abnormal returns during the event window. Further, the negative relation between ESG performance and market reaction during ESG violations is moderated by the motivation of ESG practices and the risk of greenwashing. Specifically, compared with the firms that view ESG development as a long-term goal, the negative relationship between ESG performance and market reaction is stronger for firms treating ESG as a short-term profitability tool. Companies with high greenwashing risk demonstrate an intensified negative relationship between ESG performance and market reaction during violations.

Suggested Citation

  • Chai, Hongrui & Cheng, Zhenhao & Wu, Weixing, 2025. "Is ESG performance a protective umbrella for ESG violations?," International Review of Financial Analysis, Elsevier, vol. 98(C).
    • Handle: RePEc:eee:finana:v:98:y:2025:i:c:s1057521924007907
    DOI: 10.1016/j.irfa.2024.103858
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