Sustainable stock indices surpass their conventional counterparts when the U.S. media and general public pay more attention to environmental issues, raising questions about whether their performance is based on underlying fundamentals, according to a new study.

The research by economists in France and Germany sheds light on the multi-trillion-dollar market for sustainably-branded investments, which have exploded in popularity in recent years despite lacking a standardized definition. Some commentators have dismissed sustainable investing as a “self-defeating” fad and the Trump administration has discouraged the practice. 

The authors of the paper, which is set to be published in the February issue of World Development, argue that their analysis shows sustainable investments are beneficial to investors’ pocketbooks. 

“Climate-friendly investments are not only useful for nature and climate, but they are also financially profitable, at least when climate awareness and attention to climate change continue to increase,” said Andreas Ziegler, a co-author of the paper and economics professor at the University of Kassel in Germany, in an interview. 

Ziegler wrote the paper alongside Imane El Ouadghiri of the Léonard de Vinci Pôle Universitaire, Khaled Guesmi of the Paris School of Business, and Jonathan Peillex of the Université de Picardie Jules Verne. 

The researchers examined U.S. media coverage of environmental issues from 2004 to 2018 and Google search volume for the phrases “climate change” and “pollution.” 

When these metrics showed a peak in interest in environmental issues, the sustainability-focused Dow Jones Sustainability Index generally outperformed the Dow Jones Industrial Average, while the FTSE4Good Index beat the conventional FTSE USA index. 

“The most surprising result of the study is that the estimated positive effect of public attention to environmental issues on the returns on U.S. sustainability stock indices is so robust,” said Ziegler. 

In order to measure U.S. media coverage of climate change, the researchers looked for 22 key phrases -- including “climate change,” “endangered species” and “consumerism” -- in The New York Times, The Wall Street Journal, The Washington Post and USA Today. 

During weeks when these newspapers used such phrases more often, sustainability indexes performed significantly better. The same result occurred during weeks in which Google searchers for “climate change” and “pollution” spiked. 

While the researchers admitted that these metrics were limited, Ziegler argued that they were still representative of the public interest. 

“Google is by far the most popular search engine worldwide so search queries in Google are certainly an excellent indicator for public attention,” he said. 

In addition to finding that media attention and Google searches corresponded to better performance by sustainability indices, the researchers also found that natural disasters had a significantly positive effect on such indices. That contradicts a 2016 paper in the Journal of Business Ethics which found that natural disasters did not have a meaningful effect. 

The volume of U.S.-domiciled assets using environmental, social and governance criteria increased by 38% between 2016 and 2018, according to the researchers, a trend that has only continued. ESG assets currently account for $51.4 billion in U.S. assets under professional management -- or one-third of all assets under management, according to the Forum for Sustainable and Responsible Investment. That trend is likely to continue, Ziegler said. 

“I am convinced that socially responsible investing and especially climate-friendly investments will strongly increase in the future,” he said. “The main driver for this development is the increasing public awareness of climate change and its negative consequences.”

In fact, the researcher argued that his study shows that government awareness campaigns about environmental issues can compliment more conventional environmental measures. 

“Since public attention to climate change has a positive effect on the returns on sustainability stock indices and thus, at least indirectly, on climate-friendly corporate activities, a possible policy instrument is the reinforcement of this public attention, for example, by additional information campaigns,” said Ziegler, adding that the approach could compliment market-based policy instruments like taxes and subsidies as well as regulations to mitigate climate change.

The researchers said there is much more room for research on the interactions between ESG indices and public and media attention. They suggested research should be conducted into other stock markets in Europe and Asia, as well as whether the interaction between public attention and returns also applies to green bonds. 

In addition, the researchers said other studies could use social media platforms like Facebook and Twitter as measures of public opinion instead of Google and newspapers. 

The study, titled “Public Attention to Environmental Issues and Stock Market Returns,” will be published in the January 2021 issue of Ecological Economics. The authors were Imane El Ouadghiri of the Léonard de Vinci Pôle Universitaire, Khaled Guesmi of the Paris School of Business, Jonathan Peillex of the Université de Picardie Jules Verne and Andreas Ziegler of the University of Kassel. Imane El Ouadghiri was the lead author.