News Sentiment: The Latest Pathway to Track and Trade Around ESG

February 18, 2021

Take advantage of news analytics to enhance ESG investing, from monitoring the performance of companies to building alpha-generating trading strategies.

The number of assets invested in sustainable funds has surged in recent years from just over $5bn in 2017 to $25bn in 2019 due to the increasing importance of responsible, ethical, and sustainable investing.

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Investors can make the most of the new trend in sustainable investing, known as ESG (Environmental, Social and Governance), with the help of RavenPack’s news analytics data.

The data is generated by scanning the news, identifying entities, tying them to events, and then calculating sentiment. RavenPack has a rich ESG event taxonomy that covers a wide range of ESG-sensitive occurrences, from news about companies being fined for polluting the environment, to labor disputes, to lawsuits.

The Power of Nowcasting

One advantage of using RavenPack data is that ESG sentiment for companies and assets can provide a proxy for official ESG ratings such as those provided by MSCI.

RavenPack data brings key advantages to ESG investors:

*While official ratings are updated infrequently, ESG ratings based on news sentiment can be nowcasted providing the basis for real-time ESG performance monitoring.

*Official ESG ratings are based on self-reported survey data and run the risk of being biased to present a more positive picture of a company’s ESG performance. This is especially true now given the positive boost to a company’s share price that a better ESG rating provides.

Trading ESG

ESG investing has increased in popularity not only because investors are becoming more ethically-minded, but also in part because there is a growing body of evidence that highly-rated ESG companies tend to outperform their less well-rated counterparts.

Research carried out by our data science team found that adding a positive news sentiment overlay produced even better results.

The research highlighted how stocks with a high ESG-rating tended to experience lower drawdowns during periods of negative news around ESG issues, and that these drawdowns, though sharp, tended to be relatively short-lived before stocks went on to make a recovery.

Related whitepaper:

Generate Alpha by Enhancing MSCI ESG Ratings with News Sentiment

Market Overreactions

Investors’ growing focus on ESG factors has been responsible for the evolution of peculiar market phenomena around ESG events which provided the basis for a study by researchers at Monash University in Australia.

They found that after exhaustively studying market reactions following negative news events it was possible to isolate a recurring market pattern that could provide the basis for a profitable trading strategy. Initially, they found evidence of the pattern in the U.S. but then after broadening their study they found evidence of the same phenomenon globally.

The Monash researchers identified a ‘tick-shaped’ pattern that began with the company’s share price falling steeply after the release of the negative ESG news and then drifting higher over the subsequent medium-term. They described this as a ‘market overreaction’ due to investors increasing aversion to stocks tainted by negative ESG headlines. It was the widespread offloading of such stocks by fund managers trying to meet their clients’ increasingly ESG-orientated investment goals that caused the overreaction in the first place.

Traders could take advantage of the decline using a buy-the-dip strategy, purchasing the stock price as it bottoms out a few days after the negative news headlines hit, and then holding for up to a period of 90 days whilst the stock cycled higher.

Related whitepapers:

U.S. Stock Market Reaction to ESG News

Market Overreactions after Negative ESG News - A Global Phenomenon?

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Contact us to learn more about RavenPack's rich ESG news event detection capabilities, test out your ESG trading models, and fully explore the potential of news analytics data to deliver novel insights and orthogonal alpha to your fund, business or organization.

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