Companies hemorrhaged $500 billion from 24 ESG controversies over the past five years.

The Bank of America analyzed 24 scandals relating to accounting, data breaches, sexual harassment, and other ESG issues concerning companies in the S&P 500 index. It found that over the past five years, these issues, emanating from environmental, social, and governance (ESG) practices, cost the affected companies $534 billion in value. Bank of America computed the losses on a ‘peak to trough’ basis and over 12 months following the scandal.

ESG: Bank of America analysis

The Bank of America findings put a spotlight on the growing impact of ESG on company valuations and investor preferences. Institutional investors now tend to avoid companies that are on the wrong side of ESG. Issues include climate change, scams or governance failings.

Moreover, even everyday investors are pouring money into ESG focused funds. These funds seek out climate-friendly companies or those that have good governance cultures. Therefore, the preferred companies get re-rated in the market as funds chase valuations.

Investors also work with ‘negative’ lists, which are companies such as armaments, tobacco, or coal.

According to data provider MorningStar, by late 2018, investors had pumped in $1 trillion into ESG focused mutual funds. The trend has raised concerns that valuations may be getting ahead of themselves. It also raises the specter of an ESG bubble.

Bank of America, however, did not identify the companies involved in their study that ran aground on ESG controversies.

Savita Subramanian, head of US equity and quantitative strategy at Bank of America, said ESG data had become a reliable pointer to future risks.

“Traditional financial metrics, such as earnings quality, leverage, and profitability don’t come close to ESG metrics as a signal of future earnings risk or volatility in earnings,” she said.

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