The Effectiveness of News‐Based <scp>ESG</scp> Sentiment for Predicting Stock Returns: Evidence From China

ABSTRACT This study examines the impact of ESG sentiment on the forecast of excess stock returns. We construct a monthly ESG sentiment index ( S ESG ) that captures the tone of ESG news coverage, distinguishing between positive and negative sentiment. Our findings indicate that S ESG predictions of market excess returns are statistically significant in both in‐sample and out‐of‐sample analyses, with stronger predictive power during high sentiment periods compared to low sentiment periods. Furthermore, economic tests demonstrate that S ESG generates a high Sharpe ratio and utility gains for investors, highlighting its potential economic benefits as a predictor in the increasingly important field of ESG investments.