Research Reveals Media’s Role in ESG Profitability Dynamics

Environmental, social, and governance (ESG) initiatives are often perceived as a means to enhance a company’s reputation rather than purely ethical commitments. New research from Saurabh Mishra, a professor at George Mason University, illustrates the significant influence of media perception on the profitability of ESG practices. The study, co-authored by Shekhar Misra from the University of Galway, confirms the media’s critical role in shaping the financial outcomes of firms engaged in ESG efforts.

Published in the Journal of Business Research, the study examined ESG performance data sourced from the Sustainalytics database, alongside media sentiment analytics from RavenPack. The analysis covered 452 firms over a nine-year period from 2009 to 2018, revealing a complex relationship between a company’s ethical practices and its financial success.

The findings indicate that only the environmental component of ESG had a measurable positive impact on financial performance, albeit a modest one. Among the three metrics analyzed—idiosyncratic risk, abnormal returns, and Tobin’s Q—only idiosyncratic risk showed a favorable response to unmediated environmental performance. The social and governance elements either had no significant effect or negatively impacted financial performance.

Mishra pointed out that the different components of ESG do not resonate uniformly with various stakeholders. He noted, “You can imagine the E, S, and G would not have the same effect on all stakeholders. Governance might positively impact employees, but it does not necessarily resonate externally.”

In terms of media sentiment, the research highlighted a disparity in how various ESG efforts are perceived. Companies that actively engaged in environmental initiatives received a boost in positive media coverage, which in turn correlated with improved financial performance. Conversely, social and governance initiatives did not significantly influence media discussions.

Interestingly, firms that allocated larger budgets towards advertising experienced a more pronounced improvement in media sentiment, regardless of whether their advertising directly highlighted ESG activities. Although the study did not examine specific media coverage examples or the targets of advertising spending, Mishra suggested that companies with high advertising expenditures attract more media attention, amplifying their visibility and perceived positive impact.

Mishra’s research provides clarity amidst ongoing debates regarding the effectiveness of ESG initiatives in enhancing shareholder wealth. Existing meta-analyses indicate that the overall impact of ESG on financial returns is often weakly positive or non-existent. Nevertheless, the variation in outcomes suggests that while some firms may enjoy substantial benefits from ESG practices, others may not experience the same level of success.

The implications of this research suggest that the business case for ESG might be contingent on external factors, particularly media sentiment. Mishra argues that firms should consider integrating ESG initiatives into a broader strategic portfolio, which includes advertising and other areas that may seem unrelated to environmental sustainability.

“Advertising researchers talk about a stock effect,” Mishra explained. “Advertising stock builds over time. You have to continually advertise; otherwise, that stock starts going down. So if you’re advertising substantially, you get more bang for the buck from investing in the environment.”

Despite the study’s focus on environmental aspects, Mishra cautioned against underestimating the importance of social and governance initiatives. He emphasized that these components could be beneficial when evaluated through other metrics, such as employee productivity. “I would hate to say that firms should not invest in social and governance,” he stated. “After all, there is variation in the data, and no one paper can look at every relevant factor.”

Ultimately, the research underscores that while an environmental focus may be the most effective strategy for improving media sentiment and financial performance, a comprehensive approach to ESG may yield broader benefits in the long run.