Reputation risk matters - Do investors focus on these risks?

Business reputation is not generally priced in the market. It is not goodwill, but the perception of the firm by investors as a good ethical firm and market leader with safe products. 

Reputation builds over time but can be destroyed overnight. To a degree the ESG movement addresses part of the firm's reputation issue since it assesses environmental, social, and governance risks. Firms with good ESG reputations should trade at a premium versus those with poor ESG records.

Deloitte has provided a survey of the key reputation risk drivers and the impact of a negative reputation events. (See Global Survey on Reputation Risk.) The number one risk driver is ethics and integrity and its impact on revenue and earnings. Some researchers have looked at fraud and integrity issues and find that past behavior is the best indicator future reputation risk. Fraud and fines should cause a risk premium for firms with bad behavior that generates poor reputation. Investors should focus on reputation beyond ESG and take a more holistic approach beyond three catergories.