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ESG Academic Network Roundtable Part I: Analyzing Market Reactions to ESG News


By FactSet Insight  |  May 17, 2022

Recently FactSet held its fourth annual (virtual) ESG Academic Network Roundtable, where leading academics from world-class universities presented environmental, social, and governance (ESG) research findings leveraging FactSet’s Truvalue Labs' data alongside other datasets. This is the first of two articles highlighting some of the papers presented, extracting the actionable implications for investors and corporates, where relevant.

Stock Price Reactions to ESG News: The Role of ESG Ratings and Disagreement

The paper by Harvard’s George Serafeim and Northwestern’s Aaron Yoon titled “Stock Price Reactions to ESG News: The Role of ESG Ratings and Disagreement,” presents an innovative use of FactSet’s Truvalue Labs' data. The authors present a somewhat counter-intuitive argument suggesting that ESG news coverage, as measured by Truvalue Labs' data, predicts ESG ratings, and in turn, has an affect on equity prices.

The argument begins by acknowledging and confirming the widespread understanding that various ESG ratings (e.g., MSCI, Sustainalytics, Refinitiv, Truvalue Labs, and others) have very low correlations. The low correlations lead to widespread market confusion as to what a “realistic” rating for a firm is and how to cut through the fog of ratings confusion. By focusing on how news coverage rates firms’ behaviors, as measured by Truvalue Labs' data, they can partially see through this fog to better judge rating quality and predict (within specified parameters) the impact on stock price.

The caveat is that the prediction effect is significantly modified for ratings that align across vendors for a given company. Thus, rating dispersion is key for probable stock price impact. Serafeim and Yoon found that the dispersed rating stock impact is largest when isolating the ESG categories deemed material by the Sustainability Accounting Standards Board (SASB) for the company’s respective industry.

Yoon and Serafeim construct a hypothetical long/short portfolio (using a five-factor risk adjustment) based on the dispersion findings for firms with high disagreement among raters. They then use Truvalue Labs' data to interpret the rating dispersion among other ESG raters in order to find alpha in the dispersion itself. They conclude that an alpha of approximately 4.5% can be obtained when using material SASB categories.

Clearly of direct relevance to all asset managers, this methodology also provides corporates with a means to self-reflect on the dispersion of ESG ratings for their firm, and at least in theory, a way to understand moves by their investors.

An interesting implication not explored in this paper is that ESG information (and perhaps other “new” information categories) has a long lag time (three years in this study) before the market absorbs the information as actionable knowledge. This contradicts highly simplified versions of the efficient market hypothesis, the basis of financial theory, models, and practice.

A three-year lag may be an artifact of the data coverage at the time when markets as a whole were just beginning to understand and incorporate ESG information. Going forward, this long time lag may shorten significantly. Clearly a three-year lag is not easily actionable, calling for follow-up research with current data to see if the gap closes and by how much. That said, even a three-year lag might be useful for longer-term investors with an ESG focus.

Which Corporate ESG News Does the Market React To?

Yoon and Serafeim presented a second paper on a similar theme at the roundtable. “Which Corporate ESG News does the Market React to?” examines how stock prices react to various types of ESG news.

Key takeaways:

  1. Stock price reaction is greater when news is positive
  2. More attention is paid to positive social, human, and natural capital issues
  3. News that is material to a firm’s fundamentals is more important than non-material (and thus non-financial) news. Therefore, equity prices respond to financial rather than non-financial (“non-pecuniary”) information.

The authors focus on exactly which ESG news elicits a market reaction. One interesting finding of their paper is that the market reaction to ESG news is typically not directly related to operations and fundamental firm information, but rather to the content of ESG news itself, most strongly around human/social and natural capital issues.

Truvalue Labs' data presented several benefits for the authors:

  • Artificial intelligence and natural language processing can capture massive amounts of data with less measurement error than human analysts
  • The data has a much smaller selection bias
  • The daily data allows for an event study

Additionally, Truvalue Labs' data is linked to SASB’s 26 categories and captures both negative and positive information.

One of the authors’ most important findings is that news coverage (more tilted to positive but including negative news as well) showed statistically significant market reactions for smaller firms (with adequate volume of coverage). This suggests that larger firms’ normally greater coverage was to some extent already baked into their stock price, while for smaller firms, the news was “new.” Truvalue Labs' data enables a granular understanding of which news the markets react to, as indicated in the chart below, with a high positive market price reaction of 4.5% and a negative reaction of 4.0%.


The authors found that Truvalue Labs' data is the only data available with daily market news sensitivity on ESG-sustainability topics parsed using SASB criteria. They found significant alpha, most notably for medium-sized firms, often the most difficult for which to get reliable ESG information.

The FactSet ESG Academic Network has over 120 academics worldwide who use Truvalue Labs' data in their research having to date produced about 40 papers and published articles.

Download the recording to hear from leading academics as they dive into their ESG research and show how Truvalue Labs' data can be used to analyze ESG trends and events.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.

Truvalue Labs Academic Roundtable


The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.