Working Paper: CEPR ID: DP16334
Authors: Loriana Pelizzon; Aleksandra Rzeznik; Kathleen Weisshanley
Abstract: We exploit the a modification to Sustainanlytics' environmental, social, and governance (ESG) rating methodology, which is subsequently adopted by Morningstar, to study whether ESG ratings are salient for stock pricing. We show that the inversion of the rating scale but not new information leads some investors to make incorrect assessments about the meaning of the change in ESG ratings. They buy (sell) stocks they misconceive as ESG upgraded (downgraded) even when the opposite is true. This trading behavior exerts transitory price pressure on affected stocks. Our paper highlights the importance of ESG ratings for investors and consequently for asset prices.
Keywords: Corporate Social Responsibility; ESG Rating Agencies; Sustainable Investments; Socially Responsible Investing; ESG Portfolio Choice
JEL Codes: G11; G12; G23; G59; M14; Q5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changes in ESG ratings (G38) | Investor confusion (G24) |
| Investor confusion (G24) | Trading behavior (G40) |
| Investor confusion (G24) | Abnormal returns (G14) |
| Decline in ESG ratings (F64) | Negative abnormal returns (G12) |
| Increase in ESG ratings (G38) | Positive abnormal returns (G19) |