ESG Rating Changes and Stock Returns

60 Pages Posted: 24 Sep 2022 Last revised: 29 Jan 2025

See all articles by Rients Galema

Rients Galema

Utrecht University - School of Economics

Dirk Gerritsen

Utrecht University - School of Economics; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2022

Abstract

We analyze the impact of MSCI ESG rating score changes on stock returns for U.S.-listed firms. Consistent with ESG's importance for long-term value, we find that stock prices adjust during a prolonged period of time. Specifically, we find that it takes the market multiple months to reflect changes in numerical ratings. Using holding periods of six months, decreases in ratings are followed by annualized negative abnormal returns of approximately 3%. Our results are not driven by significant firm-level ESG news events. We find evidence that part of the effect is driven by relatively salient aspects of ESG. In line with this, we find that only E rating changes are important for six-month returns while S and G changes do not have a discernible impact. We consider two mechanisms through which ESG rating changes could impact stock returns. We find that institutional investors changing their holdings around rating changes is the primary mechanism that drives our results, with sustainable index revisions having a secondary effect. Our results suggest that ESG rating changes are relevant for capital markets.

Keywords: ESG, Ratings, Institutional Investors, Sustainable Index, Environment

JEL Classification: M14, G14, D21, L21

Suggested Citation

Galema, Rients and Gerritsen, Dirk, ESG Rating Changes and Stock Returns (January 1, 2022). Available at SSRN: https://ssrn.com/abstract=4218969 or http://dx.doi.org/10.2139/ssrn.4218969

Rients Galema

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

Dirk Gerritsen (Contact Author)

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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