ESG controversies can have a substantial negative impact on financial performance, particularly when these controversies involve issues material to the sector in question or create sector-wide spillover effects. This article delves into specific case studies — ranging from a building material company's role in the Grenfell Tower fire to the opioid crisis in the USA — to illustrate how investors navigate these challenges. In addition to its monthly sector controversy reviews, DPAM has implemented a process for addressing ad-hoc controversies. These controversies are normally flagged by media reports, broker research or downgrade by data providers.

As the landscape of investing evolves, assessing a company’s ESG performance, before investing, has become crucial. One key aspect of ESG investing is understanding and mitigating the risks associated with ESG controversies. Here, we consider the financial implications of the materiality and severity of the controversy as well as possible spillover effects.

In late 2022, Teleperformance, a global leader in customer service outsourcing, faced a major ESG controversy when allegations surfaced about poor working conditions and employee mistreatment at several of its call centers. The news quickly spread, leading to public outrage and a significant backlash from investors. On November 10, 2022, Teleperformance stock fell by 33.9% (and by 8.5% over 10 days), erasing billions of dollars in market value. In the months that followed, the stock price recovered, but later was hit by a structural decline linked to AI. At the time of the controversy sentiment plummeted as analysts downgraded the stock, highlighting concerns over potential legal repercussions, reputational damage and increased regulatory scrutiny. This incident stresses the critical need for investors to consider ESG controversies in their risk assessment and investment strategies.