How do changes in ESG ratings impact stock returns?

Abstract

The main purpose of this thesis is to analyse the impact of changes in environmental, social and governance ratings of firms on their stock market returns. This analysis is done for S&P 500 firms, using ESG data from Refinitiv for the 10-year period between 2011 and 2020, by performing an event study where events correspond to the dates when there is a change in ESG,E, S and G scores. These 4 components are analysed separately, because considering aggregate ESG scores alone might have a mitigating effect and not provide such a clear picture of the possible market reactions to changes in each ESG pillar. Events are divided into upgrades, downgrades and unchanged, where upgrades and downgrades are defined as a positive or negative change in the letter rating, respectively, and unchanged rating events represent a small change in scores which does not affect the letter rating. The results from the event study provide evidence that investors react negatively to both upgrades and downgrades in ESG ratings. However, the stock market reaction is stronger in the case of downgrades. There are also some abnormal returns, even though much smaller, prior to the event dates, which can indicate some degree of speculation about the rating changes or information leakage before the ESG scores are updated.

Date of Award	23 Jan 2023
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Eva Schliephake (Supervisor)