Recent Prof. George Serafeim paper combining TruValue Labs ESG data (machine learning) with MSCI ESG data (rules based analyst) “combining big data and analyst driven ESG data allows one to identify ‘value’ opportunities in the ESG space and as a result construct an investment strategy that delivers alpha while investing in companies with greatly superior ESG performance scores.” [scores as defined by these data sets] “the price of corporate sustainability performance has increased over time. This is the estimated premium (if positive) or discount (if negative) that firms with better sustainability performance trade relative to peers after accounting for several factors such as current profitability, size, leverage, past returns and other firm characteristics.” “The higher price of corporate sustainability poses a challenge for ESG investors. Do you get a good value for money from your investments? It is not only a matter of the value of corporate sustainability anymore, but it is also a function of the price you are paying for it. Value for price is key.”
H/T George Serafeim (LI link)
“Combining corporate sustainability performance scores based on environmental, social and governance (ESG) data with big data measuring public sentiment about a company’s sustainability performance, I find that the valuation premium paid for companies with strong sustainability performance has increased over time and that the premium is increasing as a function of positive public sentiment momentum. An ESG factor going long on firms with superior or increasing sustainability performance and negative sentiment momentum and short on firms with inferior or decreasing sustainability performance and positive sentiment momentum delivers significant positive alpha. This low sentiment ESG factor is uncorrelated with other factors, such as value, momentum, size, profitability and investment. In contrast, the high sentiment ESG factor delivers insignificant alpha and is strongly negatively correlated with the value factor. The evidence suggests that public sentiment influences investor views about the value of corporate sustainability activities and thereby both the price paid for corporate sustainability and the investment returns of portfolios that consider ESG data.”
Comment: There is still a lot of practioner debate about the value of various ESG datasets and ratings. However, for those who go down a deep fundamental analysis route a variety of data sources is often seen superior than one. This is one of the first papers I have seen that has looked at combined two datasets/ratings that are developed from very different methodologies.