How ESG is Becoming a Key Driver Because of Mass Media

February 11, 2021

Ah….a darkened room, the smell of popcorn, and a good disaster movie! That is the way to spend a Saturday night!

Movies have long served as an escape from reality. But they also address current societal problems and concerns. Critics understand that movies often have the power to alter opinion, and propel audiences into action and changed behavior.

In addition to viewers, movies may also impact corporations. In their paper, “Impact of Environmental Disaster Movies on Corporate Environmental and Financial Performance,” Henry Hyun-Du Kim and Kwangwoo Park, from the College of Business, Korea Advanced Institute of Science and Technology (KAIST) in Seoul, argue that movies about human-made environmental disasters may be a catalyst for Corporation Environmental Performance (CEP), which itself is a key Environmental, Social, and Governance (ESG) factor.

Their theory: successful box-office movies strongly influence the public and investor sentiments, resulting in upward pressure on businesses to improve their environmental performance.

Even though most of the environmental disasters in the movies are unreal or have not occurred yet, the authors found that disaster films can have a negative financial impact on companies who may not be the most green.

On the flip side, the authors argue that companies who already have a well-established ESG and environmental performance, have a better financial performance and experience lower risk in the stock market following such a movie.

Their findings are especially pertinent, as the number of disaster / environmental movies has grown from an average about 1-a-year during the 1990s, to an average of more than 17-a-year between 2011 and 2017.

The authors sample-checked movies from 1990 to 2017 to prove their hypotheses.

They used an event study methodology on the movie, Erin Brockovich. This 2000 American biographical legal drama portrayed the true story of a law clerk (Erin Brockovich) who was instrumental in building a case against the Pacific Gas & Electric Company of California in 1993 for contamination of drinking water with hexavalent chromium, in the southern California town of Hinkley in 1993. The movie was released on March 17, 2000, seven years after the actual incident.

Despite the time difference between the incident and the movie release, data showed that “PG&E experienced significantly negative abnormal stock returns (between 5% and 10%) around the movie release date even after adjusting the returns with Capital Asset Pricing Model (CAPM) and the Fama-French 3-factor model (FF3 Factors).” Negative abnormal stock releases continued for two years after. A longer term look found that the abnormal return became positive after five years. The authors recognize that other factors may have contributed to the negative returns, but feel that “it is the first step toward understanding the impact.”

In another example, the researchers used the state-level data from Google Trends and subsample analyses based on the industries to analyze the 2006 documentary film, An Inconvenient Truth, directed by Davis Guggenheim. The film follows former United States Vice President Al Gore as he traveled around the world to educate people about global warming.

The study found an impact on environmental sentiment in general, which in turn, significantly influenced corporate environmental performance and ESG.

“The positive association between the environmental sentiment and CEP is still robust after controlling for the possible endogeneity issue,” write Hyun-Du Kim and Park. (Engogeneity, in this case, being whether or not public sentiment is affecting the release of the movie, or is the release of the movie affecting public sentiment.)

The authors used alternative measures of CEP, such as the firm’s total environmental costs, CO2 emissions, and GHG emissions, to help confirm their findings.

The results were consistent:

The more people that watch a movie, the more environmental sentiment grows. This in turn either adversely or positively affects business. The ESG and financial performance of an environmentally responsible firm grows favorably, hence their stocks are less impacted. The opposite appears true for environmentally unfriendly firms.

Therefore you can add mass media, specifically the movie industry, to the list of stakeholders putting pressure on companies to integrate ESG factors in business processes.

So grab some popcorn, pull up a couch, enjoy a movie and keep that respectable environmental performance going!

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Laurie Toupin