When ESG meets AAA: The effect of ESG rating changes on stock returns

Savva Shanaev; Binam Ghimire

doi:10.1016/j.frl.2021.102302

When ESG meets AAA: The effect of ESG rating changes on stock returns

Savva Shanaev^*, Binam Ghimire

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

181 Citations (Scopus)

Abstract

This study is the first to employ calendar-time portfolio methodology to investigate the impact of 748 ESG rating changes on stock returns of US firms over 2016-2021. While ESG rating upgrades lead to positive yet inconsistently significant abnormal returns of 0.5% per month, downgrades are detrimental to stock performance, leading to statistically significant monthly risk-adjusted returns of -1.2% on average. These findings are more pronounced for ESG leaders than laggards and are robust to various asset-pricing model specifications. The effects of ESG rating levels are modest, with ESG laggards underperforming in risk-adjusted terms.

Original language	English
Article number	102302
Journal	Finance Research Letters
Volume	46
Issue number	Part A
Early online date	10 Jul 2021
DOIs	https://doi.org/10.1016/j.frl.2021.102302
Publication status	Published - 1 May 2022

Keywords

event study
ESG
ESG investing
ESG rating
socially responsible investment
calendar-time portfolio

Access to Document

10.1016/j.frl.2021.102302

Cite this

@article{9f3688010c2742428070a03b1a72d5c0,

title = "When ESG meets AAA: The effect of ESG rating changes on stock returns",

abstract = "This study is the first to employ calendar-time portfolio methodology to investigate the impact of 748 ESG rating changes on stock returns of US firms over 2016-2021. While ESG rating upgrades lead to positive yet inconsistently significant abnormal returns of 0.5\% per month, downgrades are detrimental to stock performance, leading to statistically significant monthly risk-adjusted returns of -1.2\% on average. These findings are more pronounced for ESG leaders than laggards and are robust to various asset-pricing model specifications. The effects of ESG rating levels are modest, with ESG laggards underperforming in risk-adjusted terms. ",

keywords = "event study, ESG, ESG investing, ESG rating, socially responsible investment, calendar-time portfolio",

author = "Savva Shanaev and Binam Ghimire",

year = "2022",

month = may,

day = "1",

doi = "10.1016/j.frl.2021.102302",

language = "English",

volume = "46",

journal = "Finance Research Letters",

issn = "1544-6123",

publisher = "Elsevier",

number = "Part A",

}

TY - JOUR

T1 - When ESG meets AAA

T2 - The effect of ESG rating changes on stock returns

AU - Shanaev, Savva

AU - Ghimire, Binam

PY - 2022/5/1

Y1 - 2022/5/1

N2 - This study is the first to employ calendar-time portfolio methodology to investigate the impact of 748 ESG rating changes on stock returns of US firms over 2016-2021. While ESG rating upgrades lead to positive yet inconsistently significant abnormal returns of 0.5% per month, downgrades are detrimental to stock performance, leading to statistically significant monthly risk-adjusted returns of -1.2% on average. These findings are more pronounced for ESG leaders than laggards and are robust to various asset-pricing model specifications. The effects of ESG rating levels are modest, with ESG laggards underperforming in risk-adjusted terms.

AB - This study is the first to employ calendar-time portfolio methodology to investigate the impact of 748 ESG rating changes on stock returns of US firms over 2016-2021. While ESG rating upgrades lead to positive yet inconsistently significant abnormal returns of 0.5% per month, downgrades are detrimental to stock performance, leading to statistically significant monthly risk-adjusted returns of -1.2% on average. These findings are more pronounced for ESG leaders than laggards and are robust to various asset-pricing model specifications. The effects of ESG rating levels are modest, with ESG laggards underperforming in risk-adjusted terms.

KW - event study

KW - ESG

KW - ESG investing

KW - ESG rating

KW - socially responsible investment

KW - calendar-time portfolio

UR - https://www.scopus.com/pages/publications/85110481845

U2 - 10.1016/j.frl.2021.102302

DO - 10.1016/j.frl.2021.102302

M3 - Article

SN - 1544-6123

VL - 46

JO - Finance Research Letters

JF - Finance Research Letters

IS - Part A

M1 - 102302

ER -

When ESG meets AAA: The effect of ESG rating changes on stock returns

Abstract

Keywords

Access to Document

Other files and links

Fingerprint

Cite this