DP16334 The Salience of ESG Ratings for Stock Pricing: Evidence From (Potentially) Confused Investors

Author(s): Loriana Pelizzon, Aleksandra Rzeznik, Kathleen Weiss-Hanley
Publication Date: July 2021
Keyword(s): Corporate social responsibility, ESG, ESG Rating Agencies, Portfolio choice, Socially responsible investing, Sustainable Investments
JEL(s): G11, G12, G23, G59, M14, Q5
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16334

We exploit the a modification to Sustainanlytics' environmental, social, and governance (ESG) rating methodology, which is subsequently adopted by Morningstar, to study whether ESG ratings are salient for stock pricing. We show that the inversion of the rating scale but not new information leads some investors to make incorrect assessments about the meaning of the change in ESG ratings. They buy (sell) stocks they misconceive as ESG upgraded (downgraded) even when the opposite is true. This trading behavior exerts transitory price pressure on affected stocks. Our paper highlights the importance of ESG ratings for investors and consequently for asset prices.