New research from Ravenpack shows how ESG strategies can be enhanced with the use of news sentiment data.
Ravenpack made the following findings in their report:
• ESG ratings used for portfolio screening provide downside risk mitigation and a positive, albeit modest, increase in performance with respect to fully random portfolios
• The performance and downside protection of ESG-screened portfolios can be enhanced by adding a sentiment overlay
• The price reaction of ESG-related negative events leads to fast momentum signals followed by slow reversal signals
• A double overlay of broad sentiment and ESG reversal signals improves alpha generation by up to 300 basis points and reduces the maximum drawdown by a factor of 2 compared to the random market portfolio