Firms’ ESG Social Posts Fall on Deaf Ears

ESG and X are the uncool kids on the alphabet block. Political commentators readily take pot shots at corporate ratings of environmental, social and governance performance, claiming that ESG is difficult to measure and distracts companies from their primary role. And X, formerly Twitter, seemingly has been reduced to an echo chamber of aggrieved reactionary trolls. But investors are not so quick to write off ESG and X or the role they play in the financial information sphere.

Investors, particularly the institutional kind, care about ESG-related developments. A study based on text analytics and sentiment analysis of news sources showed that the market does indeed respond to positive and negative ESG news (reactions are stronger for negative ESG news). Big investors also react to business-related X posts. It’s been shown that positive and negative X sentiments affect the market’s cumulative abnormal return and its buy-and-hold return, two proxies for market reactions.

The question at the heart of this new study from the Institute for Sustainable Finance is: Do investors react to ESG social media posts as they do any other sources of information that might affect their returns? Do they take ESG posts so seriously, in fact, that they are willing to extend credit on more favourable terms or pay more for common shares to those firms broadcasting positive ESG posts?

It is not unreasonable to expect positive ESG news to be linked to the cost of credit. A study found that companies with higher ESG ratings have lower financing costs in both equity and debt markets. Whether social media posts can move ESG-friendly investors to action is up for debate.

How was the study designed?

The study analyzed 10,816 ESG-related posts issued by the Canadian firms in the S&P/TSX Composite Index on the X social media platform between 2015 and 2022. A post was classified as ESG-related if it contained any one of 121 related keywords. The researchers used a popular sentiment analysis program (based on natural language processing) to categorize posts into positive, neutral and negative sentiments. They then compared the frequency of positive and negative posts with ESG articles from a news database. The study included factors that influence the cost of equity, such as ESG score, firm size and capital expenditures.

What did the study find?

• Firms have increased their ESG-related messages on X. While just under two per cent of total posts were ESG-related in 2016, the numbers exceeded eight per cent by 2022.
• There was no evidence of an impact on firms’ cost of equity related to the frequency of their ESG messaging on X.
• Eighty per cent of ESG posts on X were largely positive, suggesting firms were selective in their disclosures. Analysis of environmental posts and subsequent reductions in GHG emissions suggests firms did not consistently follow through on their social media messages.
• An average ESG post garnered fewer retweets than a non-ESG post. 

What do I need to know?

For researchers professor Sean Cleary and PhD candidate Dhruv Baswal at Smith School of Business, the takeaway is that corporate social media posts often resemble window dressing more than material ESG news, which leads investors to disregard these messages as fluff. A percentage point less on financing costs? Forget about it. The market just yawns.

Corporate communicators are well aware of how important social media has become in investor relations. Social media platforms offer a form of engagement that legacy media are not designed to offer. But, too often, firms most in need of projecting transparency on matters of ESG — particularly those in energy-intensive sectors — seem to prefer happy talk to honest talk when they have full control of the messaging.

As the researchers point out, there are no standardized metrics to assess ESG performance and accepted formats for disclosing information through social media. That lack of standardization also gives firms more leeway to focus on positive rather than negative news. “Due to a strong correlation between ESG disclosure and ESG performance score and a lack of oversight on ESG communication,” they write, “there emerges the potential for firms to indulge in greenwashing.”

An alternate explanation may be that corporate communicators use a general social media site such as X for different purposes than influencing investors. They may view X, for example, as more of a tool for stakeholder or government relations. As the authors note, though, stakeholders can also be investors. And for corporations, broad public perception often does have a significant impact on investor decisions, making social media communications an important part of the picture.

The fact that ESG messaging on X apparently is not resonating with investors suggests that firms should walk the sustainability talk across all communication channels. 

Study title: Are investors liking corporate Canada’s ESG tweets? An analysis of Environmental, Social and Governance messaging on social media and cost of capital
Authors: Dhruv Baswal and Sean Cleary (Smith School of Business)
Published: Resource paper can be downloaded from the Institute for Sustainable Finance website.