The following is the 2022 Scroll Award winning article “ESG news from companies that the market reacts to? by George Serafeim and Aaron Yun, financial analyst journal.
Stocks respond only to financially material environmental, social and governance (ESG) news, and even more so when the news is positive, receives more media coverage, and is related to social capital issues. increase. This is the conclusion of the research I did with George Serafeim. We also found that ESG investors were motivated by financial rather than non-monetary factors, based on reactions to news that are likely to affect company fundamentals.
Past research
Previous research by Philip Kruger and Gunther Capel-Blanchardt and Aurélien Petitfor example, concluded that markets respond negatively to both positive and negative ESG news. Whether it can be generalized today is also unknown. previous research tend to have small sample sizes and focus on time periods When capital markets ignore ESG issues through the lens of agency costsdoes not distinguish between ESG-related news likely to be important to a particular industry. But there is now growing acceptance that ESG issues should impact shareholder value as they use corporate resources..
our research
The data sample we analyze is orders of magnitude larger than previous studies. This includes his 109,014 unique fixed date observations for his 3,109 companies for which his ESG news was published between January 2010 and June 2018. We categorize the sample based on the Sustainability Accounting Standards Board (SASB) materiality classification.
FactSet TruValue Labs (TVL) tracks ESG-related information for thousands of companies daily, categorizes news from various sources as positive or negative, and creates a sentiment score to determine whether the day’s news is positive or negative. Or the news is financially important. TVL draws data from many sources, including reports by analysts, the media, advocacy groups, and government regulators, and is a highly vetted, well-reputed marketplace that is likely to generate new information and insights for investors. , focuses on trusted news sources.
Our primary study design is for a fixed-day panel where the dependent variable is daily market-adjusted stock returns and the primary independent variable is an indicator of positive and negative news for the day based on TVL’s ESG news scores. is. With this daily structure, we implement an event research study design that measures short-term price responses to ESG news on a daily basis.
Our first set of analyzes shows that not all news events are associated with large changes in stock prices. Only economically significant news leads to large price movements. For example, on a fixed date with at least 3 news articles (TVL says that at least 3 articles are required for sentiment analysis to be accurate), substantially positive ESG news has a significantly positive price generated a reaction. However, the negative news did not trigger price movements of similar magnitude. Restricting the sample to key news stories receiving more than five of his ESG articles on the day of coverage increases the economic significance of the results. Negative news drives stock prices down. In contrast, no ESG news price movements are insignificant according to SASB criteria, regardless of how we limit the sample.
When assessing ESG news themes, positive and negative news categorized as social capital, i.e. news related to the impact of products on customers due to issues of product safety, quality, affordability and access, are the largest and most significant. Generate significant market reactions.This is a combination of ESG data and Ratings contain little information about product impact, most indicators reflect operational activity. We see small but large price swings associated with negative news related to natural capital and positive news related to human capital and business model innovation.
Finally, we examine how investors respond to ESG news in comparison to their expectations of companies’ ESG activities. Using the MSCI ESG Score as a proxy for investor expectations, we find it predictive of her ESG news in the future. We then divide the positive and negative news into predictive and residual components as a function of the company’s ESG performance score to determine whether the unexpected news or the news predicted by the company’s ESG score impacts the stock price. decide whether to give Our results show that the unexpected element of positive news drives investor action. This suggests that the ESG performance score has predictive power about his ESG news in the future, and that investors are incorporating this predictive factor into their stock price response.
our results
Our research paints a different picture of how investors react to ESG news. We found that investors responded positively to his positive ESG news and responded more strongly to positive news than negative news. Why are our results different from those of previous studies, investigating a time when ESG was more common and using natural language processing (NLP) to systematically measure his ESG news It depends on technological progress. This results in better measurement quality and less selection bias compared to studies that rely on human analysts to subjectively codify ESG news. In addition, we develop a better understanding of the financial materiality of ESG issues. for example,”Corporate Sustainability: First Evidence of Importance,Mozaffar Khan, Serafeim, and I have determined that companies with higher ratings on key sustainability issues show better long-term equity returns than those with lower ratings. But companies that score well on unimportant issues don’t outperform those that score poorly. By providing daily his ESG news data and using the data to categorize his ESG news according to financial significance, the market responds to financially material information even in short windows.
How will our results help investment analysis? First, as more investors integrate ESG issues into their portfolio allocation decisions, relevant news should generate greater stock price movements. . That said, little is still known about which particular issues produce the most meaningful price movements when disseminated as news. It suggests that it will lead to a swing. Second, it shows that for much of the sample, his ESG news for companies evokes little concrete response. This finding is interesting. After all, if an investor believes the market has not recognized the importance of a piece of news, there is an opportunity for further investment analysis, due diligence, and capital deployment.
Finally, we consider an analysis by news type to reveal the key information investors need on social capital issues. This can be fertile ground for deeper investment analysis and product development.
Stay tuned for more on Aaron Yun.”What corporate ESG news does the market react to?”, co-authored with George Serafeim, won the 2022 Scroll Award. financial analyst journal.
If you like this post don’t forget to subscribe enterprising investor.
All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect those of CFA Institute or the author’s employer.
Image credit: ©Getty Images / simon2579
Professional Learning for CFA Institute Members
Members of CFA Institute are empowered to self-determine and self-report the professional study (PL) credits earned, including: enterprising investorMembers can easily record credits using credits. Online PL Tracker.
Aaron Yun
