t is possible to unlock significant positive alpha using a combination of big data and traditional ESG ratings.
By combining big data and analyst-driven ESG information, investors can identify value opportunities in ESG and construct a strategy that delivers alpha while investing in companies with superior ESG performance scores. The combination yields significant positive alpha of about 4-5 per cent annually.
My paper “Public sentiment and the price of corporate sustainability” analyses data for the years 2009-18 provided by MSCI and TruValue Labs, the pioneer in artificial intelligence-driven ESG data. I use MSCI ratings for ESG performance due to their industry-wide prevalence and employ TruValue Labs’ data to find sentiment in semantic big data for ESG topics.
ESG ratings were paired with TruValue Labs’ sentiment data about a company’s sustainability performance. That data is drawn from sophisticated sources, including industry analysts, non-government organisations, media reports and think-tank analysis. The alpha came from a strategy of going long on firms with strong ESG performance and negative TruValue Labs’ ESG Momentum performance; there was also alpha found by going short on firms with the reverse.