Sustainable News – A Sentiment Analysis of the Effect of ESG Information on Stock Prices

We investigate the effect of Environmental, Social, and Governance (ESG) related news sentiment on the stock market performance of the Dow Jones Industrial Average (DJIA) constituents. Relying on a large data set of news articles that were published online or in print media between the years of 2010 and 2018, we extract each article's sentiment with respect to ESG-related topics using a dictionary approach and calculate a polarity-based sentiment index. Estimating autoregressive distributed lag models reveals significant effects of both temporary and permanent changes in ESG-related news sentiment on idiosyncratic returns for the vast majority of the DJIA constituents. According to the models' results, we can assign the stocks to different groups depending on their investors' apparent predisposition towards ESG-news, which in turn seems to be linked with a stock's financial performance.