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Sustainable investing: do ESG risks shift market dynamics?

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  • Noah Farhadi
  • Joseph F. Hair

Abstract

A record-high number of sustainable fund closures occurred in 2023, and the first annual net outflows from U.S. sustainability funds. It is widely believed this wave of divestments was primarily related to adjustments in investor priorities. We explore whether there is a relationship between environmental, social, and governance (ESG) risk ratings and stock price movements. Using the momentum oscillator relative strength index (RSI), our research focuses on 440 large companies, that were commonly held in sustainable funds in 2022–2023. The results confirm that environmental and social risks exhibit moderate, significant predictive and explanatory relationships with short-term price movements. Moreover, the findings apply to various methodological approaches, including linear, nonlinear regressions, and supervised machine learning models. Overall, empirical evidence confirms environmental and social risks exhibit both a linear and nonlinear effect on mean and median RSI values. There is an emerging need, therefore, for standardized and more frequent disclosure.

Suggested Citation

  • Noah Farhadi & Joseph F. Hair, 2025. "Sustainable investing: do ESG risks shift market dynamics?," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 15(4), pages 927-953, October.
    • Handle: RePEc:taf:jsustf:v:15:y:2025:i:4:p:927-953
    DOI: 10.1080/20430795.2025.2513250
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