Do retail investors really care about sustainability?

Saving the earth might grab eyeballs online, but it doesn’t always win retail investors’ hearts

Featured faculty: Michael Zhang
Written by Sally Ho

Social media has levelled the playing field of access to financial knowledge, granting institutional and retail investors alike equal access to timely news and sentiment that shape their decisions. Take the collapse of Silicon Valley Bank in 2023, for example. A panic spiralled on social media turned a bank with US$212 billion in assets into bankruptcy in just two days.

Meanwhile, environmental, social and governance (ESG) performance has become one of the most talked-about corporate lingos, not just among consumers but also as a signal in modern investing. Companies are held accountable for their sustainability claims and practices, and failure to do so may put them in the spotlight or, even worse, lawsuits.

Retail investors nowadays increasingly express their views online, influencing other investors’ behaviour and market movements. On social media, a company’s stance on climate change, labour practices, or corporate governance can spark heated discussions. However, little is known about how much retail investors actually value ESG practices among corporates.

“Sustainable investing has accelerated in the past few years, but most discourses focus on how ESG affects firm value or analyst recommendations,” says Michael Zhang, Wei Lun Professor of Business AI at the Department of Decisions, Operations and Technology at the Chinese University of Hong Kong (CUHK) Business School.

“There is a significant gap between the rising importance of ESG in the corporate world and the lack of understanding regarding how retail investors actually process ESG-related information.”

Professor Zhang’s latest study, Attention or sentiment: How social media react to ESG?, aims to address this gap and finds that, when it comes to sustainability, retail investors’ talk and walk don’t always go hand in hand. While retail investors do care about ESG, they may not be able to determine if such practices are financially material in the short term.

Classic dilemma of profit vs. planet

To explore how retail investors react on social media about companies’ ESG performance, Professor Zhang, along with Kalok Chan at City University of Hong Kong, Xu Dapeng of South China University of Technology, and Hong Hong of Tongji University, examines tens of thousands of posts on Seeking Alpha, a popular online community platform for retail stock investors.

With more than 17 million monthly visitors, Seeking Alpha publishes content written by diverse contributors and features comment sections, forums, and groups where users discuss investment strategies. Given these characteristics, this platform has been dubbed social media for retail investors.

The researchers focus on firms in the S&P 500 index, or the top US-listed companies. After including only firms discussed on Seeking Alpha and having ESG scores, the final sample consists of 429 firms.

“Managers should realise that in the short term, ESG gets you noticed, but financial metrics likely still drive the sentiments.”

Professor Michael Zhang

Given that online attention and sentiment are often drivers of stock market volatility and trading volume, the team categorised the posts into two key responses: social media attention and social media sentiment. Attention refers to how many posts are about a certain company, and sentiment refers to the emotional tone, including optimistic or pessimistic attitudes, towards the company.

After matching and analysing the social media posts with ESG performance scores from Sustainalytics, a global provider of ESG ratings and data, the researchers found that firms with strong ESG scores attract more social media attention. ESG score upgrades are associated with increased social media attention, while downgrades result in decreases in the following months.

However, retail investors on the platform do not necessarily express more positive feelings toward firms with high ESG scores. Investors also do not show more positive sentiment after ESG upgrades or more negative sentiment after downgrades. This suggests a disconnect where sustainability sentiment does not always align with visibility.

Talk is cheap, but vibe speaks volumes

The study further examines the three major components of ESG separately and their individual impact on social media attention and sentiment. The environmental and social components represent the main drivers of increased attention online, while the governance aspect did not have any significant impact.

For online sentiment, social and governance aspects have no significant impact, but surprisingly, the environmental score alone is associated with less favourable sentiment. This finding might seem counterintuitive, but it aligns with a specific stream of financial theory: many retail investors treat environmental efforts as a cost, rather than a clear financial benefit.

“It is likely that retail investors in these online communities often view high environmental commitment as a financial burden,” Professor Zhang says. “From a utilitarian investment perspective, extensive spending on environmental initiatives, like emission cuts or resource reduction, can be seen as an expense that might hurt financial performance.”

Despite being beneficial to wider society, investing in sustainability initiatives can raise questions about short-term profitability and provoke scepticism due to a perceived threat to a company’s bottom line. It appears that retail investors on online forums tend to be driven primarily by financial concerns, rather than environmental causes.

Research implications and future directions

ESG activities may increase visibility among retail investors, but firms shouldn’t assume that higher visibility automatically translates into a positive image, since investor sentiment is driven by profit. “Companies need to manage their expectations regarding the return on their ESG investments when it comes to public perception,” Professor Zhang adds.

“Maintaining ESG standards is crucial for relevance and visibility, even if it doesn’t immediately result in a warmer reception from retail investors. Managers should realise that in the short term, ESG gets you noticed, but financial metrics likely still drive the sentiment.”

For market analysts and regulators, the disconnect between attention and sentiment raises questions about how ESG information is communicated and interpreted. Social media may amplify awareness, but it doesn’t guarantee confidence in sustainability practices or in their financial implications.

Looking ahead, Professor Zhang expects to examine whether the findings hold true for smaller-cap companies, not just S&P 500 firms. “We also plan to explore other digital channels such as X [formerly Twitter], Yahoo! Finance, or Google search to see if the attention and sentiment dynamics might differ on general social media platforms,” he adds.

For now, the key takeaway is clear. In the digital age, seeing isn’t always believing. ESG draws attention, but steering investor sentiment requires more than just doing good.