ESG Rating Score Revisions and Stock Returns

54 Pages Posted: 24 Sep 2022 Last revised: 26 Mar 2024

See all articles by Rients Galema

Rients Galema

Utrecht University - School of Economics

Dirk Gerritsen

Utrecht University - School of Economics; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: January 1, 2022

Abstract

We analyze the impact of ESG rating score revisions on stock returns for U.S.-listed firms. Consistent with ESG's importance for long-term value, we find that stock prices adjust during a prolonged period of time due to long-term investors. Specifically, we find that it takes the market multiple months to reflect revisions. Using holding periods of six months, decreases in ratings are followed by annualized negative abnormal returns of approximately 3%. Our results appear to be mostly driven by decreases in the Environmental rating. Specifically for this E rating, we find three mechanisms that are congruent with our findings. First, part of the returns can be explained by sustainable index revisions following rating revisions. Second, long-term institutional investors decrease their holdings after a decrease in ratings. Third, rating downgrades are followed by increases in risk. Our results suggest that ESG rating revisions are relevant for firm valuations.

Keywords: ESG, Environmental, Ratings, Institutional Investors, Sustainable Index

JEL Classification: M14, G14, D21, L21

Suggested Citation

Galema, Rients and Gerritsen, Dirk, ESG Rating Score Revisions and Stock Returns (January 1, 2022). Available at SSRN: https://ssrn.com/abstract=4218969 or http://dx.doi.org/10.2139/ssrn.4218969

Rients Galema

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

Dirk Gerritsen (Contact Author)

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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