Recently, I posted about using large language models of AI to analyze earnings calls for sentiment to pick stocks. In addition to sentiment, these models can also rank the importance of the various themes extracted from the earnings call. Significantly, ProntoNLP's approach can automatically extract a fixed set of the 150 most important themes since 2010. Extracted themes like 'Financial Performance,' ‘Business Strategy,' or 'Cost Management' are the most important yearly.
The rank of the theme may be less informative than how the rank changes because changing importance is associated with changing narratives. Based on the annual ranking of the 150 themes, you can derive the changing ranked importance of a theme over time. The changing significance of the E, S, and G themes of ESG, shown in the chart, is especially illuminating.
There are three themes named in the set of 150 that are relevant to ESG: Sustainability Initiative (E), Corporate Social Responsibility (S), and Corporate Governance (G). These themes, their names, and their importance ranks were generated automatically from earnings calls. The chart shows the different dynamics of importance for these themes since 2010. The bottom of the chart indicates the presidents during this period, with separators before the 2016 and 2020 elections.
For the chart, a decrease in rank means increased importance (1 is the most important rank). Governance (G, with purple line) was increasingly significant during the Obama years and peaked in 2015, well ahead of Trump's 2016 election. During the Trump years, G decreased in importance and bottomed out in 2020, ahead of Biden's term. It is tempting to suggest that G peaked in 2022. Does the recent trajectory of G's importance say something about which candidate companies expect to win a likely Biden-Trump contest in November?
Social (S, with red dashed line) started to grow in importance at the beginning of 2019. Still, it peaked in 2020 and is in evident decline in importance, perhaps reflecting a growing anti-woke environment.
Environment (E, with green line) started its climb in 2018 and grew sharply in the year of Biden's election. E does not show signs of declining importance.
The chart shows the separately shifting foci of the pieces of ESG. It reveals that companies have nuanced attitudes towards E, S, and G. This AI-aided analysis points to political and cultural backdrops during the different administrations reflected in company attitudes about what is important. You could invert this and say these company attitudes are potential indicators of the narrative animating politics and culture. You can apply this type of analysis to other themes that matter to companies.
