Companies that Ward Off ESG and Reputation Crises See Value Surge

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New Steel City Re study shows Wall Street rewards effective governance and management strategies for ESG and reputation risks.

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“Investors appear to reward firms that actively manage reputational risks as operational strategies and not just potential PR problems,” said Nir Kossovsky, Steel City Re CEO.

Companies with ESG and reputational risk protection strategies have seen their stock prices rise 5% above the market within two weeks of a reputational challenge, and that premium is almost double for companies that have publicly shared and validated those strategies.

The study, by Steel City Re, an ESG and reputation insurer, also found that stock prices of firms that managed, validated and publicized ESG and reputation risk management strategies on average gained 9.3% over the subsequent seven months after a precipitating event, while firms in which such processes were assumed by shareholders to be in place gained 4.3%. Companies that failed to institute, validate, and communicate risk management strategies lost 13.2% of their stock value over those seven-month periods, and they underperformed their peers by an average of 23.3%.

“Investors appear to reward firms that actively manage reputational risks as operational strategies and not just potential PR problems,” said Nir Kossovsky, Steel City Re’s CEO. “Our study makes the case for ESG-focused firms to take a more structured, substantive and comprehensive approach to risk governance and management.”

“The data show that instituting, validating, and communicating risk management strategies can both fulfill the goals of stakeholder-centrism and meet shareholder expectations,” he added.

Illustrative highlights include:

  • Johnson & Johnson (NYSE:JNJ) outperformed the market by 16% ($1.7bn) when its much publicized strategic supply chain security and product safety processes were proven effective in 1986.
  • Rolls Royce (OTCMKTS: RYCEY), whose board defined its risk governance mission as protecting the reputation, viability, and profitability of the firm, outperformed the market by 14.9% ($3.4bn) after it proved the quality of its safety controls throughout its supply chain in 2011.
  • Apollo Global Management (NYSE:APO) outperformed the market by 16.6% ($1.9bn) after it announced an ESG-focused governance reorganization and presented in 2021 an independent validation of a 3-year investment in reputation risk management.
  • CVS (NYSE:CVS) outperformed the market by 9.3% ($8.6bn) when, presciently anticipating the ESG movement, it pursued an ethical innovative strategy that shunned tobacco products in 2014. It outperformed rivals Walgreens (NYSE:WBA) and Rite Aid (NYSE:RAD) by 16.6% and 24.8% respectively.
  • Apple (NADQ:AAPL) outperformed the market by 24% ($505bn) after introducing innovative ethical privacy features that addressed a critical ESG concern in the technology sector in 2021. It outperformed Meta (NYSE:FB), facing a range of privacy challenges, by 34.9%.

About the Study
The Steel Re study looked at seven firms that took direct action to publicize their reputation risk management and governance, 20 firms whose protection strategies were assumed by shareholders to be in place because of their response to external events, 20 firms whose strategies were shown to be insufficient over seven months, and from among these, 22 firms whose reputational impairment and value losses were measured against peer competitors.

The reputational challenges were all public events over the past 15 years supplemented by iconic cases of Johnson & Johnson’s two Tylenol-related safety events of the 1980’s. Individual gains and losses were calculated after normalizing for changes in the S&P500, and the date for ESG and reputational events was determined by a marked surge in stakeholder interest as explored in a related Steel City Re white paper.

About Steel City Re
Steel City Re provides parametric ESG insurance, reputational insurance and helps guide companies’ boards and senior leadership in developing enhanced risk governance and management practices. Its underwriting model is supported by more than 7.3 million measures of reputational value and traditional financial metrics that also fuel ESG-focused hedge fund strategies. Its risk governance and management models are informed by principles of behavioral economics.

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