ESG Rating Score Revisions and Stock Returns

Abstract

We analyze the impact of ESG rating score revisions on stock returns for U.S.-listed firms. We find that it takes the market multiple months to reflect revisions. Using holding periods of six months, decreases in ratings are followed by annualized negative abnormal returns of approximately 3%. Our results appear to be mostly driven by decreases in the Environment rating. Specifically for the Environment rating, we find three channels that are congruent with our findings. First, institutional investors decrease their holdings after a decrease in ratings. Second, sustainable index revisions are a channel through which rating revisions affect returns. Third, rating downgrades are followed by increases in systematic risk. Our results suggest that ESG rating revisions are relevant for firm valuations.

Keywords: ESG, Environment, Ratings, Event study

JEL Classification: M14, G14, D21, L21