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Harmonious coexistence between people and nature is a long-standing topic in discussions of sustainability in the development of the economy and society. Through a series of relevant policies and regulations, governments around the world have urged firms to fulfill their corporate social responsibility (CSR) in terms of environmental, social, and governance (ESG) policies to promote the sustainable development of the economy and society.
Previous studies have tended to identify which ESG indicators are associated with firm values. For instance, Pedersen et al. (2020) used carbon intensity, non-sin stock indicators, and accruals as measures of environmental, social responsibility, and corporate governance measures, respectively, finding that proxy governance indicators lead to relatively positive returns. Moreover, Kim et al. (2019) used toxic chemical release as the primary measure of a firm’s environmental performance and found that local institutional ownership is negatively related to toxic pollution.
As professional rating agencies attempt to score ESG performance across firms in aggregate, some studies have used ESG scores to examine the impact of ESG performance on firm values. The abovementioned rating agencies include Morgan Stanley Capital International (MSCI), Thomson Reuters, Bloomberg, Financial Times Stock Exchange (FTSE) Russell, and RobecoSAM (Yoon et al., 2018; Zhang et al., 2020; Yu et al., 2018; Aouadi and Marsat, 2018). The assessment of ESG scores by these rating agencies relies heavily on the annual and CSR reports1 issued by the firms themselves. However, the information provided by firms is likely subjectively biased (Duque-Grisales and Aguilera-Caracuel, 2019). Indeed, Escrig-Olmedo et al. (2019) pointed out that rating agencies do not fully integrate sustainability principles into the ESG assessment process. In addition, in some developing countries, such as China, there are no strict regulations that require listed firms to release their CSR reports annually2, making it more challenging for rating agencies to assess ESG scores. Moreover, Avramov et al. (2022) pointed out that there are significant differences in the ESG scores of certain firms across different rating agencies, which they define as uncertainty. Therefore, the assessment of ESG performance with external information that can be an effective complement to existing ESG scores is of great necessity.
The abovementioned deficiencies in ESG scoring can be remedied from the perspective of news reports, providing a viable option for obtaining more objective and accurate ESG reports. Specifically, news articles usually describe a firm's issues and events in a neutral and unbiased manner (Schudson, 2001). In addition, the media can cover all listed firms and report the associated news on a daily basis. Recent studies in behavioral finance have found a direct connection between firm-related news coverage and firm performance. For example, Yu et al. (2013) used an equilibrium model with empirical evidence that firm value is affected by media disclosures. Moreover, Mitchell and Mulherin (1994) found that relevant news reports from Dow Jones could reflect a firm’s market performance to some extent. More recently, some studies have pointed out that the content of news articles is significantly associated with firm performance in the stock market (Tetlock, 2007; Tetlock et al., 2008; Carretta et al., 2011). ESG-related news can be used to assess the ESG performance of a firm, acting as a valuable supplement to ESG scores from a third-party perspective.