(Originally titled, “Social Sentiment and Predictable Returns”). This paper shows that shifts in investor preferences for Environmental, Social, and Governance (ESG) attributes affect asset prices. Using Internet search volume to capture ESG sentiment shifts, we propose a novel firm-level measure of return sensitivity to ESG sentiment (i.e., ESG beta). We find that ESG beta does not predict firm profits but stocks with more positive ESG beta earn higher abnormal returns and attract more investor demand. This predictability is stronger among firms headquartered in regions with high Republican concentration and stronger beliefs against ESG issues. Overall, these results suggest that financial markets misprice firm-level ESG attributes.
