The Economic Impact of ESG Ratings

63 Pages Posted: 13 May 2022 Last revised: 16 Jan 2024

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 fund holdings, stock returns, and firm behavior. First, we show that among five major ESG ratings, only MSCI ESG can explain the holdings of US funds with an ESG mandate. We document that downgrades in the MSCI ESG rating substantially reduce firms' ownership by such funds, while upgrades increase it. However, this response in ownership is slow, unfolding gradually over a period of up to two years. This suggests that fund managers use ESG ratings mainly to comply with ESG mandates rather than treating them as updates to firms' fundamentals. Accordingly, we also find a slow and persistent response in stock returns. For a one-year holding period, downgrades lead to an abnormal return of -2.37%. For upgrades, we find a positive but weaker effect. Yet, the extent to which ESG ratings matter for the real economy seems limited. We find no significant effect of up- or downgrades on firms' subsequent capital expenditure. We find that firms adjust their ESG practices following rating changes, but only in the governance dimension.

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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