Historically investors have focused mostly on the financial performance of firms. Basic economic theory states that risk-averse investors maximize their utility, which is modelled as a function of risk aversion, risk and return. We find these concepts too limited and are now witnessing a changing paradigm. Robeco, amongst many of its clients, recognize that investors have a social responsibility. As investors we allocate capital to investments that we deem attractive, but utility is not only a function of financial risks and returns. Sustainability is increasingly becoming an integrated part in investors’ decision-making.
The academic debate on whether ESG factors have predictive power for future stock performance has not been settled yet. The literature suggests that not (only) ESG level can be informative, but also changes in ESG scores can be an indicator of changes in the risk-return characteristics of a stock. This type of ESG momentum strategy that uses traditional ESG scores, however, often uses outdated information since most ESG data is updated infrequently, often lagging by months or a year.
In this research we want to investigate whether a short term public sentiment in ESG can be informative. At Robeco, we have an exhaustive database available, containing a wide array of pre-processed sentiment data for many textual documents. We have already identified a few interesting hypotheses to test using this sentiment data. First, if changes in ESG characteristics drive stocks returns, it may also be attractive to invest in companies with worse ESG scores and recent improvements or positive sentiment instead of ESG leaders (which cannot improve much more). Second, it could be the case that investors tend to overreact to large negative but transient ESG events. Finally, some other interesting questions are whether we can make use of recent sentiment information to predict an update in ESG scores, or whether it can provide us with a timelier signal on firm-specific downside risk.
This internship topic is suitable for any student with a quantitative background. Knowledge of financial markets is not required, although some affinity with sustainability or investing is appreciated.
Nagy, Kassam and Lee (2016) “Can ESG add alpha? An analysis of ESG tilt and momentum strategies” Journal of Investing 25(2).
Serafeim (2020) “Public sentiment and the price of corporate sustainability”, Financial Analysts Journal 76(2).
Tetlock (2007) “Giving content to investor sentiment: The role of media in the stock market”, Journal of Finance 62(3).