Stock Price Reactions to ESG News: The Role of ESG Ratings and Disagreement

Abstract

We investigate whether ESG ratings predict future ESG news and the associated market reactions. We find that the consensus rating predicts future news, but its predictive ability diminishes for firms with large disagreement between raters. Relation between news and market reaction is moderated by the consensus rating. In the presence of high disagreement between raters, the relation between news and market reactions weakens while the rating with most predictive power predicts future stock returns. Overall, while rating disagreement hinders the incorporation of value relevant ESG news into prices, ratings predict future news and proxy for market expectations of future news.

Keywords: ESG; ESG (environmental, social, governance) performance; ESG (environmental/social/governance) performance; ESG disclosure; ESG ratings; ESG reporting; ESG disclosure metrics; sustainability; Investments; news; disagreement; rating disagreement; ratings

JEL Classification: G12, G14, M4