The ESG Stopping Effect : Do Investor Reactions Differ Across the Lifecycle of ESG Initiatives?

In general, investors respond favorably to firms’ ongoing ESG initiatives. In three experiments, we examine whether their reactions differ across the lifecycle of ESG initiatives. In particular, we predict and find evidence of an “ESG stopping effect.” Even when investors react similarly to the launch of new initiatives that are ESG-related versus non-ESG-related (i.e., general business initiatives), they react more negatively when companies stop ESG initiatives versus when they stop general business initiatives. Our theory and evidence suggest that this more pronounced negative response to stopping ESG initiatives stems from investors’ sensitivity to the ethical considerations inherent to ESG. That is, ethical implications of a firm’s initiatives loom larger for investors’ judgments when initiatives are stopped compared to when they are started. We also find that investors’ negative reactions to stopping are exacerbated when ESG initiatives are relatively more effective, and are reduced but not eliminated when firms provide financial justification for ending the ESG initiative