This article was originally published at the Harvard Business School. Click here to read the original article.


There is a connection between public sentiment about a company and how the market rewards its corporate social performance, according to George Serafeim. Is your company undervalued?

For the first time, a link has been drawn between public sentiment about a company’s sustainability practices and how that company is valued in the market.

The results are important both for investors searching for under-valued, socially responsible companies, and for companies themselves that believe their sustainability efforts are not being fully rewarded by the market.

In particular, the research shows companies with overall good performance in their Environmental, Social, and Governance (ESG) programs can increase their market value by carefully monitoring public sentiment about those efforts and proactively addressing issues when negative stories arise.

“The positive association between ESG performance and market valuation is stronger for firms with more positive public sentiment momentum,” writes Harvard Business School Professor of Business Administration George Serafeim, the report’s author. “An increase in a firm’s ESG performance has nearly two to three times the effect on a firm’s market valuation for a firm with positive relative to a firm with negative public sentiment momentum.”


Although researchers have studied returns around socially responsible investing and around corporate ESG performance, there has been little attention paid to how public sentiment momentum drives or limits market awareness of corporate ESG initiatives.

“The evidence suggests that public sentiment influences investor views about the value of corporate sustainability activities and thereby both the price paid for corporate sustainability and the investment returns of portfolios that consider ESG data,” the paper concludes.

Serafeim’s paper, Public Sentiment and the Price of Corporate Sustainability, takes public sentiment data around sustainability activities obtained from TruValue Labs, culled from news stories, industry analysts, NGOs, and think tanks, and combines it with traditional ESG metrics from MSCI, commonly used by analysts.

The research examined firms from January 2009 through June 2018—a period in which the number of companies that were included in the sample and covered by both data providers rose to almost 1,900 from about 340.

In 2018 alone, $80 trillion in assets under management had publicly committed to some form of ESG principles, according to the paper. Such a big pool of potential investments can make it difficult for investors to distinguish between companies paying lip service to ESG, known as greenwashing or goodwashing, from those that truly get better results in their financial performance.

“A portfolio that bought companies with strong sustainability performance and negative sentiment, and sold companies with bad sustainability performance and positive sentiment, has done very well in the last 10 years,” Serafeim says. That suggests “that firms with strong sustainability performance and negative sentiment have been undervalued.”

Domino’s vs. Cheesecake Factory

In one of the paper’s examples, Domino’s Pizza and The Cheesecake Factory both scored an average ESG performance of 5.2 (out of 10) on MSCI’s scale based on factors that included climate change, product safety and quality, and nutrition or health categories. Yet investor momentum differed drastically: Domino’s scored a 15 to Cheesecake Factory’s 87 (out of a 100) in TruValue Labs’s sentiment metrics, driven by lower evaluations for customer welfare as well as perceptions of quality and safety.

But the opposite was true in their stock performance: Over the past five years, Domino’s outperformed while Cheesecake Factory underperformed. So, the market factored ESG performance into the stock price for Cheesecake Factory but not for Domino’s. (Serafeim chose these companies in part to dispel the notion that sustainability activities are only for niche industries and companies.)

“It’s not only about the investments,” Serafeim says. “It’s about the overall sentiment that society has, and the perception the public has, about the impact that you’re having on society.”

Often, a single event or poor communication about how ESG is folded into everyday operations of a company can mask good performance, Serafeim says.

“You might be making great investments and great efforts around climate change and decarbonizing your business,” Serafeim says. “But if you are really lacking in data privacy, the market can completely discount all those efforts.”

Serafeim advises companies to be clear when communicating details on how ESG policies are part of their everyday operations. Having a separate report that looks at ESG doesn’t cut it anymore, he says.

“It’s a lot about safeguarding the investments and really creating sustainability as a holistic strategy inside the organization, not as separate activities.”

Practical implications

The research results have practical implications for investors and companies.

For investors, “The evidence presented here suggests that combining ESG performance scores with big ESG data might be helpful in identification of stocks with superior and undervalued ESG characteristics,” the report states.

When investors can pinpoint ESG-conscious companies that aren’t getting credit in the markets because of overall negative sentiment, returns over benchmark indexes or peers can be between 4 percent to 5 percent better, known as “positive alpha” on Wall Street, the paper found.

For companies, the results suggest that monitoring sentiment shifts in the presence of new analyses by NGOs, media, industry analysts, and other sources is important in understanding if capital markets reward a company’s investments in sustainability activities.

Serafeim next wants to study how corporate ESG disclosures come into play for companies and investors.

“Many companies are increasing their disclosure either through a sustainability report, integrated reports, or by using standards such as the ones from the Sustainability Accounting Standards Board,” Serafeim says. Others are trying to derive an environmental profit and loss account, or social balance sheet.

“The question is not only how do those corporate disclosure activities actually shape public sentiment, but also vice-versa.”