1. Introduction

The inclusion of environmental, social, and governance factors-ESG factors-has become increasingly relevant to companies, organizations, societies, and investors. Particularly for the latter, since decision-making becomes more relevant through their investments and risk mitigation processes.

The entire global community has also recognized the “new” mindset. For example, the World Economic Forum (WEF) Global Risks Report 2024 states that seven out of ten of the global most severe risks over the long term belong to environmental or societal related risks-five environmental and two societal (^{WEF, 2024, p. 8}).

Another example is ^{Krueger et al. (2020)}, who carried out a survey focused on identifying the relevance of climate factors for institutional investors in five key areas:

They concluded that for investors, reputation, moral or ethical considerations, legal or fiduciary duties, as well as financial motives, are the motivations that justify the incorporation of these factors.

Likewise, one of the revelations in that study-which will support part of the results of our analysis-is that respondents believe that stock valuations do not fully reflect the risks of climate change. Failing to include ESG factors like sustainability and corporate responsibility properly can affect financial performance in such a way that this could ultimately damage the value of companies and the financial instruments associated with them, i.e., bonds or stocks.

The literature refers potential benefits associated with investing in sustainable instruments or including practices of this nature. To cite an example: more than 20 years ago, market practice (mainly in Europe) regarding sustainability was limited to generating exclusion lists. This practice, which some asset managers maintain, excludes companies, sectors, or countries from the investment universe if they involve certain activities with defined criteria.

Among the most common exclusion criteria are activities related to weapons, pornography, and tobacco. In this context, the first studies on sustainable investment attributed higher capital costs associated with companies without “green” practices than those that did (^{Heinkel et al., 2001}).

Another factor considered in the literature that could affect returns and, therefore, company valuations is the pricing power of some companies for being socially responsible. According to studies, this is due to the feeling of loyalty generated among customers (^{Albuquerque et al., 2020}). Alternatively, some studies have determined that economic agents can receive different non-monetary benefits from simply holding or including assets with green characteristics in their investment strategies (e.g., ^{Baker et al., 2022}; ^{Fama & French, 2007}).

Some other studies, such as ^{Cornell and Damodaran (2020)}, have tried to generate frameworks to determine the correct way to integrate ESG factors within the valuation of financial instruments. The above considering the growing pressure from politicians, regulators, interest groups, and even investors who commonly sugarcoat their speeches of inclusion of these factors with the promise that it will be good for their results and their shareholders.

In that same sense, we find a broad consensus in the literature on investors’ sustainability preferences (^{Bauer et al., 2021}; ^{Ceccarelli et al., 2023}; ^{Heeb et al., 2023}, among others). Empirical studies indicate that economic agents support sustainable investments, even if this implies sacrificing returns. ^{Barber et al. (2021)}, ^{Hartzmark and Sussman (2019}), and ^{Ceccarelli et al. (2023)} document that investors find value in strategies associated with sustainability in different ways. The studies highlight the importance of interest in pension funds for sustainability issues, such as the Sustainable Development Goals (SDGs). Significantly, ^{Bauer et al. (2021)} provide evidence that support for sustainable investments is driven by strong social preferences of investors such as pension funds.

However, the studies cited, and others available in the current literature have focused their research on the economies of developed countries that, in addition to having much more solid economies, have more solid financial systems and more and better-quality information for all participants. All this allows the market to consider more variables and make more accurate decisions. Likewise, the evidence of preferences is still far from showing the impact of these decisions, so it is essential to analyze the effects they could have on measurable characteristics such as valuations.

Given the above, the objectives of this study are, on the one hand, to collect information on controversies associated with ESG factors in some Mexican companies that are listed on the stock exchanges in the country and, on the other hand, to identify whether said controversies have had significant effects in the share prices of these companies.

2. Description of the Methodology

A quantitative experimental research approach was adopted to conduct this study using historical data on Mexican stock prices and controversies related to ESG factors.

Based on these data, we used the Student’s t-test with a 5% significance level to analyze the relationship between the returns associated with the shares before and after the ESG controversy and, in this way, verify if there were significant differences in the average of the returns obtained from the generation of the controversy. The methodology considers the following stages:

3. Methodology Development

Initially, it was necessary to determine a pool of issuers that could be analyzed in terms of their daily valuation and potential controversies. Therefore, all capital issuers (shares) listed on the Mexican Stock Exchanges were selected as an initial set, resulting in 202 issuers. We stress the omission in our study of the capital of private companies due to the small amount of information available and the lack of homogeneity of said information. These requirements are considered essential to identify changes in market valuations.

The Bloomberg information platform provided the basis for the issuers’ database. Subsequently, issuers with a broad historical range of publicly available prices were identified and selected for the following steps of the study. The selected history range ensures that comparability can be established between the prices of the instruments at different times, allowing for the construction of a consolidated information base of historical prices of Mexican capital issuers. It is important to mention that this database resulted in 106 issuers with information from January 2013 to January 2024.

Subsequently, using data from two information platforms-Bloomberg terminal and Morningstar Direct-ESG controversies were identified for Mexican capital issuers whose information was verifiable. We related this to the original base of issuers. For the relationship of ESG controversies with the different issuers, it was necessary to generate a dispute classification process where:

For an initial analysis, localization of epicenters in the historical prices chart was done; nevertheless, no further information was obtained from this review. The resulting graphs will be available in Annex A of this study (see Annex A).

Regarding classifying controversies within each ESG pillar, we identified that, in the first analysis, the most significant number of controversies fell within the governance pillar.

Once the epicenters were identified, the following hypothesis test was proposed.

H₀: µ_i = µ_j

H1: µi ≠ µj Such that:

µ_i : the average returns before the epicenter or ESG controversy

µ_j : the average returns after the epicenter or ESG controversy

The Student’s t-test is appropriate for the exercise since the comparison of performance, in the case of our analysis, is a typical exercise for comparing statistical parameters of populations or samples (^{Department of Statistics and Data Science, n.d.}). Likewise, to carry out this statistical procedure, the three necessary characteristics are determined as true (normality, independence, and heteroskedasticity), taking into account the following:

Once the requirements were met, the statistical analysis was generated through the significance test, and it was determined that 95% would be the most appropriate confidence level to justify the analysis.

Student’s t-tests were used to compare the means of the returns associated with the stock prices before and after the controversial event and, additionally, to avoid potential biases due to the temporality dilution of the events, the tests were carried out at three temporalities with daily observations: The periods are the following:

4. Analysis of the Results

From the proposed statistical model, information is derived at different levels, the most relevant for the study being the significance level with which the null hypothesis is not rejected in most cases (95%) as can be observed in Table 2. Taking this parameter into account, only for epicenter 1 of Issuer 5 it is possible to reject the null hypothesis, so we would not have enough information to say that the difference between the means of the a priori and a posteriori samples of that epicenter are significantly similar, meaning that in this case, the controversy affected in particular the average returns between both periods (see Table 2).

The event in which the null hypothesis was rejected corresponds to shareholder demands towards the company for an alleged bribery case, a controversy associated with the corporate governance classification. From the above, it is clear that the event, in addition to being controversial, had legal implications, and the materialization of the revaluation and its “permanence” to a medium temporality in the study is presumed to be due to this.

The second relevant result is associated with the different temporalities analyzed, so no trends are identified for the same event in different periods. This could be interpreted as the fact that the effects of controversies lack “permanence” within the behavior of asset valuations, in addition to not being significant. It should be noted that this result may be affected by “other” variables since other additional factors that could directly impact the valuations are not isolated. Nevertheless, even in the benchmarking-alpha analysis, there was no evidence of any trends or permanence among the different periods (for details, see Annex B).

5. Conclusions

Based on the study results, we can infer that current controversies due to ESG factors have not been included substantially in the valuations of financial assets in public companies in the Mexican financial system. However, the growing global and local pressure from regulators, investors, and the market to include these factors in determining investment strategies should end up affecting the valuations of these assets, so it will be worth continuing to carry out this type of analysis, given that ESG factors have a significant presence within the Mexican financial system.

From the above, the following potential areas of opportunity are identified: the creation of approved databases on controversies and the development of clear and detailed methodologies to incorporate ESG factors into the valuation of different financial assets.

The latter is relevant because although this study focused on capital instruments, the steps to follow for other asset classes and types of instruments will need to be determined.

Finally, it is observed that for the local market, the issues related to the governance of companies are much more pressing, but without leaving aside social and certainly environmental issues. This phenomenon is attributed to the fact that Mexico is still a country classified as “emerging” by, for instance, the International Monetary Fund (^{IMF, 2024}) and must adapt to the best international practices, so the adoption of ESG factors would allow a more orderly transition and, therefore, faster development into a developed economy.