“One Day You're In, and the Next Day, You’re Out”: Using Abnormal Returns to Investigate the Role of ESG as a Moderator for Environmental Controversies in the Fashion Industry

Abstract

Although ESG ratings have grown substantially as a financial accountability mechanism across global capital markets, little empirical work has examined their role in the fashion industry– one of the world's most environmentally consequential consumer sectors. This paper contributes to the literature by documenting the financial consequences of environmental controversies for publicly traded fashion firms, and testing whether pre-existing ESG performance moderates those consequences. Using an event study methodology across a sample of 45 North American and European fashion firms with 318 environmental controversy events recorded by RepRisk over the period 2013 to 2024, this paper first establishes that environmental controversies generate statistically significant negative cumulative returns and cumulative abnormal returns across all event windows, confirming that capital markets impose measurable financial penalties on fashion firms following environmental incidents. OLS regression results show that neither the overall MSCI ESG score nor the environmental pillar score serves as a statistically significant moderator of market penalties in the full sample, though both carry consistently positive coefficients. A severity-based robustness check finds that restricting the sample to moderate controversies restores statistical significance to the overall ESG score in the immediate event window, suggesting that ESG credentials provide conditional reputational insulation only below a severity threshold beyond which investor confidence erodes regardless of prior environmental performance. A geographic decomposition further reveals a striking regional divergence: among European firms, the environmental pillar score is a positive and statistically significant predictor of smaller abnormal return penalties across all event windows: the only specification in the analysis this where rating carries measurable moderating power, while neither rating type achieves significance in North American markets. The country-level carbon emissions policy indicator is the most consistent determinant of market reactions across all specifications, suggesting that public regulatory context conditions the financial consequences of environmental controversies more reliably than private ESG credentials. These findings carry implications for whether private market ESG mechanisms can substitute for public regulatory pressure in driving environmental accountability in an industry whose sustainability commitments remain misaligned with its operational practices.