ESG ratings in motion: the global market response to upgrades and downgrades

We employ a calendar-time portfolio approach to investigate the effects of ESG rating changes on a comprehensive sample of global stocks rated by MSCI between 2017 and 2021 (2,841 stocks, including 2,100 upgrades and 813 downgrades). Rating upgrades (downgrades) result in positive (negative) abnormal returns of approximately 1% per month, both statistically and economically significant, aligning with previous studies. These effects remain robust to holding period definitions, alternative factor models and weighting schemes, and they appear relatively consistent across sectors and regions becoming more synchronised since the COVID-19 pandemic. The market is shown to partially anticipate ESG rating upgrades but not downgrades. The impact of ESG rating changes on stock returns is particularly stronger for large firms, growth firms, and those operating in countries with low power distance. Overall, these findings add to the sustainable finance literature, especially on ESG rating heterogeneity, by revealing key determinants of the ESG–financial performance relationship.