The Economic Impact of ESG Ratings

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. We focus on changes in the MSCI ESG rating, which we show is the most relevant rating for the holdings of ESG mutual funds in the US. 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