Risk Mitigation of Corporate Social Performance in US Class Action Lawsuits

We investigated the relationship between corporate environmental, social, and governance (ESG) performance and litigation risk by examining US class action lawsuits. We found that a 1 standard deviation improvement in the ESG controversies of an average company in the sample reduced litigation risk from 3.1% to 2.4%. Moreover, an average company with low ESG performance exhibited a loss in market value twice as large as that of a company with high ESG performance—an abnormal loss of US$1.14 billion. Implementation of our findings with a trading strategy yielded positive monthly alphas, suggesting that investors benefit from lower litigation risk and the insurance-like protection of high ESG performance.Disclosure: The authors report no conflicts of interest. This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors. Editor’s note: Submitted 24 April 2020Accepted 1 December 2020 by Stephen J. Brown.This article was externally reviewed using our double-blind peer-review process. When the article was accepted for publication, the authors thanked the reviewers in their acknowledgments. Jie Cao and one anonymous reviewer were the reviewers for this article.