When ESG Talks : ESG Tone of Annual Reports and its Significance to Stock Markets

Since ESG topic consistently gains on importance in the investment universe, companies provide investors with information regarding recent and future ESG activities through different reporting channels. The most recent research finds relevance of ESG-related corporate activities for formation of investors’ opinion regarding company’s valuation and growth prospects. Based on a sample of more than seventeen thousand unique 10-K reports of US companies filed with SEC in period 2013 to 2019, this study shows evidence for significant relation of ESG textual tone of annual reports to stock market returns of filing companies around report filing dates. Using an ESG linguistic dictionary recently proposed by Baier, Berninger, and Kiesel (2020), this study shows evidence for significant relation of social and governance-related tones to stock returns, while environmental tone being ignored by the markets. When looking at individual words from the lexicon, such words as “community”, “health”, “control” imply positive reaction of markets, while “discrimination”, “embezzlement”, and “crime” are related to negative returns. Differentiation between forward and non-forward ESG statements shows that markets pay particular attention to future-related ESG sentences used in annual reports