Investor Reliance on ESG Ratings and Stock Price Performance

67 Pages Posted: 10 Mar 2021 Last revised: 24 Jan 2022

See all articles by Aleksandra Rzeźnik

Aleksandra Rzeźnik

York University

Kathleen Weiss Hanley

Lehigh University - College of Business

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration

Date Written: December 2021

Abstract

We exploit a quasi-natural experiment, the recalibration of Sustainalytics’ environmental, social, and governance (ESG) rating methodology, to study the implications of investor reliance on ESG ratings on stock price performance absent any change in firms’ underlying ESG fundamentals. Abnormal returns are positively correlated with the direction of the ESG ratings change. Restricting the analysis to firms without any change in their relative ESG risk, we show that investors’ blind reliance on ratings, particularly retail investors, may result in suboptimal investment decisions that exert transitory price pressure on affected stocks. Our paper highlights the importance of ESG ratings for investors and consequently for asset prices.

Keywords: Corporate Social Responsibility, ESG Rating Agencies, Sustainable Invest- ments, Socially responsible investing, ESG, Portfolio choice

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 (December 2021). 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 ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Kathleen Weiss Hanley

Lehigh University - College of Business ( email )

Bethlehem, PA 18015
United States

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

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