Interest in environmental, social, and governance (ESG) sentiment analysis has grown in recent years, and investors are fast discovering its uses. Increasingly, ESG is not only about doing the most socially responsible thing but also about making smart investment decisions. By tracking the mood of stakeholders towards ESG issues, investors can gain a better understanding of how these factors may impact a company’s stock price.
In this blog post, we will discuss the challenges of ESG sentiment analysis, the tools available to help with this task, and how you can use them to make informed investment decisions.
ESG sentiment analysis is a complex task for a number of reasons. First, there is the challenge of defining what constitutes an ESG issue. While there are some general guidelines, ESG issues can be very company-specific.
For example, a company in the oil and gas industry may be assessed on its environmental record, while a company in the banking sector may be assessed on its social responsibility practices. This lack of standardisation can make it difficult to compare ESG sentiment across different companies and sectors.
To meet this challenge, ESG analysts need to have a good understanding of the ESG issues that align with their companies’ value assets within the context of their specific industry. They also need to be able to assess how these issues are likely to impact the company’s stock price.
Another challenge is that ESG sentiment data is often unstructured and hard to gather and analyse. This data may be scattered across social media, news articles, company filings, and other sources. This can make it difficult to obtain a comprehensive picture of ESG sentiment towards a particular company.
Thankfully, with the advancement of natural language processing (NLP) and natural language understanding (NLU) technology, it is now not only possible, but easy to analyse unstructured ESG data sources. For example, ESG analysts can use NLP to analyse social media posts for mentions of ESG issues. This allows them to track the ESG sentiment of a company in real-time and identify any potential issues early on.
Investors can also use NLP to parse relevant information from company filings and news articles. This can help them to track ESG developments over time and make informed investment decisions.
It is also important to contextualise ESG sentiment data. For example, a negative social media post about a company’s environmental record may not be significant if the company is in an industry with poor ESG standards. However, if the company is in an industry with strong ESG standards, then this negative social media post could be more significant.
This is why it is important for investors to have a good understanding of the companies they are investing in and the ESG issues relevant to their competitors and other key players in their industry. This way, they can put ESG sentiment data into context and have a clearer understanding of its significance.
ESG sentiment can be very fluid. Issues that are important today may not be perceived as equally important tomorrow, and vice versa. This makes it difficult to track ESG sentiment over time.
Measures of sentiment can be heavily determined by current events. For example, during the pandemic, ESG issues such as health and safety, working from home, and social responsibility have become more important to investors. As a result, ESG sentiment has shifted towards these issues.
During summer months, climate change is a hot topic while heatwaves and wildfires make headline news, and urgency to act is felt more acutely amongst the public. This increased focus on climate change results in ESG sentiment shifting towards environmental issues whenever a climate-change-related natural disaster occurs.
However, just because these sentiments fluctuate, it doesn’t necessarily reflect the general trend of public sentiment. Climate change, for example, doesn’t cease to be an important issue in more temperate months, it’s just that the public focus may be temporarily directed elsewhere.
In order to get an accurate measure of ESG sentiment, it is important to track it over a longer period of time. This way, you can see the general trend of ESG issues, and identify any potential long-term consequences. It’s also important to be aware that these short-term changes in public sentiment can still affect the stock market.
ESG sentiment analysis can be a valuable tool for investors. By tracking the mood of stakeholders towards ESG issues, investors can gain insights into how these factors may impact a company’s stock price.
For example, by tracking public sentiment towards a company’s environmental record, an investor can gauge how ESG-conscious the market is and make investment decisions accordingly.
ESG sentiment analysis can also help investors to identify potential issues early on, which can allow them to take action before the issue causes significant financial damage. For example, a sudden plummet in sentiment towards a company’s health and safety standards could be an early warning sign of a potential scandal.
ESG sentiment data is also valuable for portfolio companies themselves. By tracking how the public feels about their ESG performance, companies can identify areas where they need to improve. This can help them to avoid any reputational damage and maintain a good relationship with their stakeholders.
There are several ESG risk assessment tools available on the market, though sentiment analytics may or may not be included in these assessments.
One popular ESG risk assessment tool is the Sustainalytics ESG Risk Rating by Morningstar Inc.. This tool provides a comprehensive analysis of a company’s ESG risks and opportunities. It also includes a score that rates the company’s overall ESG performance, which can be useful for comparing different companies and understanding overall industry performance.
As of July 2020, Sustainalytics made the information of their ESG Risk Rating publicly available, so it’s a great springboard into researching ESG sentiment if you’re not sure where to start.
If you’d like a more in-depth look specifically at public sentiment around ESG issues, Symanto offers a range of sentiment analysis tools. Using the most advanced NLP technology, Symanto can gather and analyse thousands of social media comments and/or reviews and track how ESG issues are being discussed online. They can also objectively analyse news reports, and other unstructured data and measure sentiment by topic or concept to provide insights into how ESG stories are being received by the media.
With Symanto, it’s also very easy to compare the sentiment of multiple companies since data is from a public source. This can be extremely valuable for investors who want to understand the context of ESG sentiment across a specific industry.
At Symanto, our tools are highly flexible and have multiple applications for investors to understand more about their portfolio companies. ESG sentiment analysis is just one way to utilise our platform.
Our team of data researchers and analysts are on hand to help you make the most of our tools. Get accurate and reliable insights to help inform your strategy and make solid, data-based investment decisions today. Contact us to find out more and our team will be happy to assist you.