Effects of Firm ESG Rating Changes on Stock Returns

Is growing interest in environmental, social, and governance (ESG) issues among investors and asset managers materially affecting stock selection decisions and associated returns? In the September 2022 version of their paper entitled “The Economic Impact of ESG Ratings”, Florian Berg, Florian Heeb and Julian Kölbel measure impacts of ESG rating changes on associated mutual fund holdings and stock returns. They focus on average abnormal holdings changes and average cumulative abnormal returns from: (1) 12 months before rating change up to the change, and (2) from the ratings change through 24 months after the change. Abnormal returns control for firm leverage, size, book-to-market ratio and profitability, and for stock return beta and momentum. Using quarterly fundamentals and monthly stock returns and ESG-dedicated mutual fund holdings for 3,665 firms with a total of 2,545  MSCI ESG rating upgrades and 2,133 downgrades during February 2013 through September 2020, they find that:

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