ESG investing and media attention to environmental issues

Abstract

The study of investments that ensure environmentally responsible and sustainable development is becoming an increasingly relevant research topic in the field of empirical asset pricing. In this paper, we analyse how ESG scores’ effect on future returns change when environmental issues receive relatively high media coverage. Investors might only take environmental issues into account if they are confronted with the problem of global warming more frequently in the press. We assess the importance of environmental issues in media with machine learning based Structural Topic Modelling (STM) methodology, using news published on investing.com. Running Fama-MacBeth regressions we find that in periods, when media actively reports on environmental issues ESG scores have significant impact on future returns. Whereas, in months when fewer such articles are published investors do not take sustainability measures into account, and ESG scores have no explanatory power.