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How Markets Price ESG: Have Changes in ESG Scores Affected Stock Prices?

Many researchers have studied the link between companies’ Environmental, Social and Governance (ESG) characteristics and financial risk and performance. This paper examines some of the underlying economic questions: How have markets priced ESG characteristics? Have they been fully priced? Have there been sweetspots? How quickly did the market incorporate ESG information? We investigate these questions by looking into how changes in companies’ ESG profiles have historically predicted equity price movements while all other influences, including the market, remain controlled. We find that ESG momentum may offer important new insights into how global markets price stocks.