As the ESG and sustainable investing movement grows, Societe Generale quantified the potentially large consequences for companies that don't follow suit.
The firm found that in two thirds of "high ESG controversy" cases a company's stock experienced "sustained underperformance," trailing the global index by an average of 12% over the course of the following 2 years.
The firm defined a "controversy" as "when a company's activity has unintended and/or undesired negative environmental and/or social effects on stakeholders, with corresponding reputational risk," adding that it's the "extreme ESG downside risk, with at times a massively negative impact on company share prices."
The firm based its analysis on 80 past ESG controversies, dating back to 2005 and spanning regions and sectors.
"A controversy event will halt the rise in a stock price, and for a sustained period: a solid two years ... Prior to the high controversy occurring, these companies were typically performing in line with the market," analysts led by Charles de Boissezon said.
In addition to underperforming the MSCI World Index by 12%, the stocks typically lagged their regional sector by 4%.
The firm noted that a stock's drop can contribute significantly to the performance of its regional sector, which is why the underperformance relative to the global benchmark was more extreme.
ESG investing strategies grew to more than $30 trillion in 2018, according to Global Sustainable Investment Alliance, and that number is set to keep rising as consumer tastes shift and investors demand more transparency. By many accounts, companies can no longer afford to ignore these factors.
Sustainable investing was a key theme at this year's World Economic Forum in Davos, with a number of world leaders and CEOs stressing the urgency of the climate crisis.
"All investors are saying, 'I want you to invest in companies doing right by society,'" Bank of America CEO Brian Moynihan said at Davos. "We have $25 billion in ESG funds, and more is going there."
This follows BlackRock CEO Larry Fink's comments in January that the climate crisis is about to trigger "a fundamental reshaping of finance" as issues like climate change "become a defining factor in companies' long-term prospects."
Following a high controversy ESG event, Societe Generale found that it's typically best to sell the stock immediately. If sticking with the name, the firm said to reassess after six months since if it's still lagging at that point, "chances are ... it will remain so for quite some time."
The firm identified a watchlist of 12 companies that have experienced a high ESG controversy in the last year, all of which have underperformed since. The list includes Wells Fargo, Boeing, Chevron, Boston Scientific and Vale.
- CNBC's Michael Bloom contributed reporting.