The Economic Impact of ESG Ratings

54 Pages Posted: 13 May 2022 Last revised: 7 Oct 2022

See all articles by Florian Berg

Florian Berg

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Florian Heeb

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Julian F Kölbel

University of St. Gallen - School of Finance; MIT Sloan; Swiss Finance Institute

Date Written: September 4, 2022

Abstract

This study examines the impact of ESG ratings on mutual fund holdings, stock returns, corporate investment, and corporate ESG practices, using panel event studies. Looking specifically at changes in the MSCI ESG rating, we document that rating downgrades reduce ownership by mutual funds with a dedicated ESG strategy, while upgrades increase it. We find a negative long-term response of stock returns to downgrades and a slower and weaker positive response to upgrades. Regarding firm responses, we find no significant effect of up- or downgrades on capital expenditure. We find that firms adjust their ESG practices following rating changes, but only in the governance dimension. These results suggest that ESG rating changes matter in financial markets, but so far have only a limited impact on the real economy.

Keywords: Responsible investing, social impact, ESG ratings, asset prices, corporate investment, corporate governance

JEL Classification: G11, G12, G32, G34

Suggested Citation

Berg, Florian and Heeb, Florian and Kölbel, Julian, The Economic Impact of ESG Ratings (September 4, 2022). Available at SSRN: https://ssrn.com/abstract=4088545 or http://dx.doi.org/10.2139/ssrn.4088545

Florian Berg

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02142
United States

Florian Heeb

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Julian Kölbel (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St. Gallen, 9000
Switzerland

MIT Sloan ( email )

100 Main Street
Cambridge, MA 02142
United States

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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