SAFE Working Paper No. 310

Investor Reliance on ESG Ratings and Stock Price Performance

We exploit a quasi-natural experiment, the recalibration of Sustainalytics’ environmental, social, and governance (ESG) rating methodology, to study the implications of investor reliance on ESG ratings on stock price performance absent any change in firms’ underlying ESG fundamentals. Abnormal returns are positively correlated with the direction of the ESG ratings change. Restricting the analysis to firms without any change in their relative ESG risk, we show that investors’ blind reliance on ratings, particularly retail investors, may result in suboptimal investment decisions that exert transitory price pressure on affected stocks. Our paper highlights the importance of ESG ratings for investors and consequently for asset prices.