An Alternative Measurement of Environmental, Social, and Governance with Textual Analysis

I propose an alternative measurement of ESG by textural analysis with sustainability reports of firms. The ESG scores available to general investors are disclosed by Korea Corporate Governance Service (KCSG) and Sustinvest in Korea, but the information is not only restricted to ESG scores in the recent one year, but also limited to grades from A to E without an explanation for such grade which prevent discernable comparison between the firms in the same group. Furthermore, if investors want to make ESG strategies according to a specific metrics in ESG such as carbon commission, the extant ESG ratings do not help such investors. Using sustainability reports of firms, I propose an alternative measurement of environmental, social, and governance with textual analysis by making two indexes; calculating scores of systematic (common to firms) environmental, social, and governance scores with the number of frequencies of words for three ESG pillars, and calculating scores of idiosyncratic (unique to firms) environmental, social, and governance scores with the average cosine similarity measure for three ESG pillars. I empirically test the association of systematic scores and idiosyncratic scores with the ESG scores of KCGS and Sustinvet, and find that the systematic score and the idiosyncratic scores do have insignificant relations. I believe that such results indicate the alternative measurement of ESG has incremental information not found in ESG score of two ESG agencies. The alternative measurement of ESG help investors not only to understand the concrete reason of score but also to set an investment strategy according to their specific emphasis points of ESG.