Introduction

ESG-focused investors track ESG score changes (momentum) and social sentiment (how stakeholders perceive company ESG performance). Combining signals improves predictive power: companies with improving ESG scores AND positive stakeholder sentiment show stronger outperformance than either signal alone.

Signal Integration

Extract ESG score changes (quantitative momentum). Extract social sentiment from news, social media regarding company ESG efforts. Combine signals: high ESG momentum + positive sentiment predicts strong returns; high momentum + negative sentiment suggests greenwashing (negative return predictor).

Application

Long companies with dual signals (improving ESG + positive sentiment). Avoid/short greenwashing candidates (high ESG momentum + skeptical sentiment). Backtest on ESG fund performance confirms dual-signal strategy outperformance.

Conclusion

Combining ESG momentum with social sentiment improves ESG factor model predictive power.