Investing in equity markets can often be a high-risk situation. Participants are on the lookout for reducing drawdowns and risks while also predicting maximized stock returns. Investors often use stock screening tools to mitigate risks. One such metric is the ESG rating. These ratings are intended to assist investors in identifying economic, social, and governance opportunities and risks in their holdings. Thousands of data points across 37 core ESG issues related to environmental, social, and governance topics are collated with industry-specific rules to produce a global ESG ranking, which is then used to generate a global ESG rating.
However, these ratings are not enough to gauge the risk and viability of an investment decision. The paper recognizes the importance of taking sentiment into consideration to get a more realistic image. The paper uses a combination of RavenPack sentiment indicators with the ESG ratings to predict stock returns. The sentiments are based on data points extracted from news and social media platforms.
These platforms can signal two kinds of events i.e., impactful, and non-impactful based on their novelty. The paper assumes that the impactful events are the ones that will form to be a more reliable screener than non-impactful events.
The study shows that using ESG ratings with the added overlay of the raven pack sentiments can be a beneficial stock screener. It increases efficiency while reducing risk and can increase the chances of a boosted portfolio performance. All findings are based on quantitative research. To democratize its findings, the study works on four randomized portfolios which are categorically market, ESG, a combination of ESG and sentiment, and a double overlay portfolio.
This whitepaper is a great knowledge resource for anybody who is a part of the investment market, both small scale, and large scale. Download and read the paper to leverage the information in your investment strategies.