Zhuoran Li, Weiping Qin
Tourism is one of the most environmentally sensitive industries, highly exposed to environmental, social and governance (ESG) risks that can disrupt market stability and investor confidence. This paper investigates the return predictability of aggregate incident-based ESG risk in the tourism industry. Using the RepRisk database and the Partial Least Squares (PLS) method, we construct a bottom-up tourism ESG risk indicator and find that it can statistically and economically predict tourism market returns, especially during the COVID-19 pandemic crisis. The predictive power is driven by firms’ fundamentals, cash flows, and investor sentiment toward ESG-negative news. These findings provide novel insights for investors and researchers regarding investment strategies and asset pricing.