The problem with ESG is that this label bolts together three different topics: Environmental, Social, and Governance. The ESG label was introduced and made mainstream in the 2004 United Nations Report ‘Who Cares Wins.’ The attempt to combine the three topics with one label has entangled ESG in politics and led to serious disagreement about what to measure. When FactSet reported early in March that the reference to the phrase ‘ESG’ in earnings calls in 2023 dropped to a pre-2019 level, it looked like another item pointing to the demise of a fad.
However, Hernando Cortina posted a report using data from ISS Market Intelligence that shows sustainability funds and ETFs had considerable AUM growth, outpacing peers in 2023. Earnings calls provide evidence consistent with this trend. The FactSet data focused on the label ‘ESG.’ But AI-based analysis lets us reveal a more useful sense of what is happening.
As we’ve posted previously, we use large language models of AI to extract sentiment on earnings calls using ProntoNLP. One element of our work involves semantic content in a way that lets us extract and rank the importance of a fixed set of the top themes on earnings calls each year since 2010. How the rank of a theme changes over time is especially revealing. One of the themes extracted on calls is ‘Sustainability Initiative.’ The chart here shows that the importance of this theme began to increase in 2018. Based on this theme-ranking measure, the importance of the sustainability theme in company reporting has grown considerably. In 2024, it remains well above pre-COVID levels.
Companies have been unbundling the ESG topic, assigning growing importance to sustainability to highlight when they speak to investors on earnings calls. I suspect companies wouldn’t do this unless they felt it added to their investment appeal.
