ESG Rating Score Revisions and Stock Returns

Abstract

We analyze the impact of MSCI ESG rating score revisions 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 revisions. 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 revisions are important for six-month returns while S and G revisions 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 revisions are relevant for firm valuations.

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

JEL Classification: M14, G14, D21, L21