Investor Reliance on ESG Ratings and Stock Price Performance

64 Pages Posted: 10 Mar 2021 Last revised: 8 Nov 2024

See all articles by Aleksandra Rzeźnik

Aleksandra Rzeźnik

York University - Schulich School of Business

Kathleen Weiss Hanley

Lehigh University - College of Business; European Corporate Governance Institute (ECGI)

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE; Ca Foscari University of Venice - Dipartimento di Economia

Date Written: July 27, 2022

Abstract

We exploit a quasi-natural experiment, the change in Sustainalytics' ESG rating methodology, which reassesses risk and inverts the rating scale, to examine how reliance on ESG ratings impacts stock returns. The change in the ESG rating influences stocks' returns but this is mainly due to retail investors' misinterpretation about the change in the ratings scale. Sophisticated investors, such as 13F institutions and short sellers, take advantage of individual investors' blind trust in ratings by taking the opposite side of their trades. We find no effect on mutual funds' portfolio rebalancing or investor flows. Firms react to the change in their ESG rating and subsequent abnormal returns by issuing or repurchasing shares.

Keywords: Corporate Social Responsibility, ESG Rating Agencies, Sustainable Investments, Socially Responsible Investing, ESG, Investment, Stock Price

JEL Classification: G11, G12, G23, G59, M14, Q5

Suggested Citation

Rzeźnik, Aleksandra and Hanley, Kathleen Weiss and Pelizzon, Loriana, Investor Reliance on ESG Ratings and Stock Price Performance (July 27, 2022). SAFE Working Paper No. 310, Available at SSRN: https://ssrn.com/abstract=3801703 or http://dx.doi.org/10.2139/ssrn.3801703

Aleksandra Rzeźnik

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Kathleen Weiss Hanley

Lehigh University - College of Business ( email )

Bethlehem, PA 18015
United States

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Loriana Pelizzon (Contact Author)

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.safe-frankfurt.de

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

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