The Power of ESG Ratings on Stock Markets
Speaker(s)Loriana Pelizzon (Goethe University Frankfurt, Germany)
Date and time
March 17, 2021
16:00 - 17:00
If you are interested in participating in this particular seminar or want to receive information about this series seminar, please email us.
This paper studies the impact of environmental, social, and governance (ESG) ratings on investors’ preferences and stock prices. We exploit a change in ESG rating methodology that non-linearly shifted ESG ratings for firms as a natural experiment. We show that the ‘pseudo’-changes in the ESG ratings induced by the change in methodology are unrelated to potential fundamental changes in firm’s sustainability. Yet, we find that an exogenous change in a stock’s ESG rating exerts a transitory price pressure and alters the composition of stock ownership. Individual investors are especially sensitive to the ‘pseudo’-changes in the ESG ratings. They (dis)invest in stocks that they misconceive as ESG (down-) upgraded. Short sellers act as arbitrageurs and take the other side of retail investors’ trades. Overall, we find that a one standard deviation quasi-increase in the ESG ratings translates into 1pp drop in stock monthly abnormal return. Joint with Carmelo Latino and Aleksandra Rzeźnik.