Does negative ESG screening work?

Here’s a note from Bob Eccles about this study (as discussed in this blog):

Shiva Rajgopal, Jing Xie, and I (who have been an advisor to Philip Morris International for three years) have recently completed a study about the effect of investor exclusion on sin stocks such as alcohol, gaming, oil and gas, and tobacco. The bottom line is that we find very little evidence that exclusion has any negative effect on companies in these industries when compared to a matched sample of firms with similar characteristics. Sin stocks actually have a higher Tobin’s Q than the matched sample of non-sin stocks and this is driven by the oil and gas sector.

There is no difference in cost of new equity. We do find that their cost of debt is higher. There are other differences such as sin stocks having higher capital expenditures to sales, equity issuance, and acquisitions. We also find that investors submit more ESG proposals and a larger number of proposals are passed. This suggests the value of engagement if voting for these proposals is more than virtue signaling by investors. Putting our study in the broader context of a robust literature on this topic, we conclude that findings on the hypothesis that negative screening hurts sin stocks is very much a function of the research design used in the study.