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The economic impact of ESG ratings

Author

Listed:
  • Berg, Florian
  • Heeb, Florian
  • Kölbel, Julian

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

Suggested Citation

  • Berg, Florian & Heeb, Florian & Kölbel, Julian, 2024. "The economic impact of ESG ratings," SAFE Working Paper Series 439, Leibniz Institute for Financial Research SAFE.
    • Handle: RePEc:zbw:safewp:308045
    DOI: 10.2139/ssrn.4088545
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    More about this item

    Keywords

    Responsible investing; social impact; ESG ratings; asset prices; corporate investment; corporate governance;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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