The economic impact of ESG ratings
Research questions: How strongly do ESG ratings affect financial markets? And how much positive real-world impact do they have?
The paper is joint work with Florian Heeb and Julian Kölbel. We examine the impact of ESG ratings on mutual fund holdings, stock returns, corporate investment, and corporate ESG practices using panel event studies. We specifically look at changes in the MSCI ESG rating (arguably the most prominent one).
We find that changes in MSCI ESG ratings trigger changes of ESG mutual fund holdings. Surprisingly, it takes up to 15 months for portfolio managers to adjust their holdings. We also find a negative long-term response of stock returns to downgrades and a slower and weaker positive response to upgrades. Regarding firm responses, we find no significant effect of up- or downgrades on capital expenditure. We find that firms adjust their ESG practices following rating changes, but only in the governance dimension. These results suggest that ESG rating changes matter in financial markets, but so far have only a limited impact on the real economy.