Combining big data and ESG ratings to find alpha

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Big data business scientist presenting the concept In 2018, there have been over 250,000 unique English articles focused on ESG issues across 8,000 companies according to data from TruValue Labs.

But how does public sentiment influence the market pricing of firms’ sustainability activities?

Harvard Business School Professor George Serafeim explores the relationship between public sentiment and how markets value corporate sustainability activities in his working paper titled “Public Sentiment and the Price of Corporate Responsibility,” released in October 2018.

His findings suggest that combining ESG performance scores with big ESG data may help identify stocks with superior and undervalued ESG characteristics.

Serafeim’s research combines MSCI ESG ratings and data from TruValue labs on public sentiment momentum from 2009 to 2018.

The report demonstrates a stronger positive association between ESG performance and market valuation for firms with more positive public sentiment momentum.

“An increase in a firm’s ESG performance has nearly two to three times the effect on a firm’s market valuation for a firm with positive relative to a firm with negative public sentiment momentum,” the paper said.

However, he also finds that if there is negative public sentiment a firm’s sustainability performance is valued less, yet associated with positive abnormal returns in the future.

The results to Serafeim’s work suggest that the market undervalues sustainability activities when there is negative public sentiment.

He highlights that this has implications for investors. “One of the things that I find in the paper is that in general finding good value opportunities in the ESG space means that you need to find firms that really have solid ESG performance, but at the same time the market hasn’t recognized it yet,” Serafeim says.

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