Company earnings calls a year into the crisis: How has the conversation shifted?

Natural language processing allows us to follow the arc of investors’ and executives’ attention through analysing the words they use when they meet. In our paper The Language of a crisis in April last year we documented the increase in references to COVID-19 and related phrases in these interactions. A little over a year later, second-quarter earnings calls give us our first glimpse of how the conversation has shifted, in a world which is finally showing signs of progress tackling the coronavirus.

We find that while direct references to the virus have fallen sharply in recent months, its knock-on effects are clear in many of the words that have replaced them. We also see signs of an evolved investment landscape, with some ESG topics attracting significant interest for the first time.

How are investors talking about COVID-19?

A simple way to understand the change in dialogue is to study how often certain words have appeared in the investor questions section of company meetings.

This analysis tells us that investors have talked less about the coronavirus in recent months and the context in which they have done so has shifted appreciably. For example, references to “COVID”, “lockdown” and “distancing” – which first appeared in transcripts in February last year, and rose sharply to a peak in the summer, have since figured much less frequently. All are among the words with the largest decrease in mentions between the second quarters of 2020 and 2021.

By contrast, “vaccination” and related keywords were among those with the biggest year-on-year increases, shown in the word cloud below.¹  “Pre-pandemic” saw an even bigger gain as investors sought to take stock of how the virus had affected companies’ longer-term positioning; “post-pandemic”, by contrast, had only about a fifth of these mentions, perhaps a sign that analysts recognise the crisis is far from over.

COVID-19’s economic consequences becoming clear

Of course, the ongoing influence of COVID-19 cannot be measured solely in direct mentions of words like virus and vaccine. Other terms, more broadly related to the global economy, also have clear links to the pandemic and associated policy response.

For example, as economies shut down last year, supply chains around the world ground to a halt and the resulting capacity problems have become increasingly evident as industries (notably the automotive industry) have recovered.

In this context, mentions of “shortages” – of “chips”, “components” and “semiconductors”, in particular – have seen a precipitous increase in recent months. (More specific shortage-related mentions include Winter Storm Uri and the Suez Canal, blocked for six days in March.)

In line with this, references to “inflation” have also risen, while those to “recession” – which spiked in the second quarter of last year – have declined. Unsurprisingly, “stimulus” has been on many investors’ minds, with references climbing sharply since the first quarter of 2020 and reaching a peak in the second quarter of 2021.

A changed investment landscape?

Other notable increases provide interesting insights into the current market environment. For example, the rise in references to “crypto” in recent months was almost as remarkable as the increase in the prices of digital currencies to their second-quarter highs. Investor questions about “SPACs” – Special Purpose Acquisition Companies established to take companies public, something they’ve done at record levels in recent months – also saw a meteoric rise.

Arguably the most distinctive trend in the data, however, is the dramatic increase in references to ESG-related topics. “EVs” (electric vehicles), “carbon”, “RNG” (renewable natural gas) and “diversity” all featured among the words with the biggest uptick in mentions from management and investors in the past 12 months. References to “ESG” itself appeared almost six times more frequently in investors’ questions to management in the second quarter of this year than a year ago.

This perhaps reflects a higher number of dedicated ESG analysts on calls, but it is worth noting that management teams also discussed ESG much more in their presentations to investors. This is a marked turnaround. In recent years, investors have paid increasing attention to ESG investing, reflected in significant flows into sustainable investment strategies. Even in the US – which has lagged other regions around the world in adopting ESG investment trends – flows into sustainable funds doubled between 2019 and 2020 (and set a new record in the first quarter of 2021). Despite this, ESG topics have rarely been discussed on earnings calls. The April to end of June transcripts show this finally changing, with analysts and executives around the world belatedly catching up to investor demand for responsible investing.

Admittedly, focusing on individual words’ mentions is a rather anecdotal approach. How can we be more systematic? Our machine learning model of ESG commitment helps us to better understand the context of these mentions. We trained this model to classify ESG-related paragraphs in documents into a selection of 12 themes, covering a range of environmental, social and governance topics. When we apply the model to second-quarter earnings transcripts, as the chart below shows, we find a marked increase in the environmental and social initiatives categories, which overtook our ‘environmental compliance’ category as the biggest focus for management teams last year, albeit remaining at low levels. Investor questions (not shown) saw a similar trend. Looking forward, this shift from a compliance mindset to one based on new initiatives – many addressing pandemic working conditions, diversity, and social justice – seems to bode well for a continued focus on ESG.

Evidence of positive signals

In our earlier note on how COVID-19 was showing up in earnings transcripts, we looked forward to a time when references to the coronavirus and other keywords would stabilise then fall, and their tone would improve. These, we felt, would be early signs of a recovery from the crisis.

A year on, these positive signals are very much in evidence. While still a focus, references to coronavirus have fallen sharply in recent months; in their place, we find more discussion of how companies plan to navigate the recovery. While investors and managers see challenges ahead, they also see opportunity, and are showing a greater commitment to sustainability than before.