Are Improvements Recognized? ESG Investing from the Public’s Perspective

Environment, Social, and Governance (ESG) have become an important agenda for corporate managers, investors, and the public. The growing recent literature has been documenting and explaining ESG’s impact on asset prices in equilibrium. Given the highly turbulent nature of ESG and the difficulty of measurement, ESG factors are heavily affected by the taste and attention of the public. I propose a new proxy for the public’s attention and sentiments on public companies after a de facto change in companies’ ESG performance metrics. I examine how the public and investor commu- nity are perceiving the changes in public companies’ performance in the ESG space over time. In a panel of S&P 500 constituent companies with quarterly frequency from 2011 to 2021, I find empirical results that indicate a significant difference in public at- tention on different sectors, which leads to a cognitive lag for the public sentiments on companies’ ESG situations of varying degrees. Following the literature on risk hedging using ESG factors brought up by Engle et al., 2020 and alpha construction by Lioui and Tarelli, 2022, I further study the asset pricing implications of the lag by evaluating a public sentiment factor.