Corporate ESG News and The Stock Market

Abstract

ESG investing's popularity has continually increased in the past five years. ESG data is increasingly integrated into investment processes. However, the information contained in ESG-related news for corporates has not been entirely exploited by institutional and long-only investors. The objective of this paper is to identify the benefits of ESG news information for active and factor-based investors. Indeed, one of the issues with ESG is the low frequency of score updates. For active management, we analyze ESG-sorted portfolios in investment universes filtered by ESG news volume. Metrics of ESG-related news are sourced from Truvalue Labs, a provider of Artificial Intelligence-powered ESG insights and analytics. We find that the approach of a universe focused on ESG news of corporates has been efficient in the early 2010s on the lower ESG-ranked side of the universe, but also on the higher ESG rank. More recently, it has positively contributed to more dynamic approaches of ESG investing. Finally, increasing the sensitivity to the highly visible SDGs significantly improves the return of ESG long-short portfolios.

Keywords: ESG, ESG sentiment, ESG materiality, SASB, SDG, multi-factor models, NLP

JEL Classification: C38, M14, Q56