Stock Price Reactions to ESG News: The Role of ESG Ratings and Disagreement

Do ESG ratings matter in controversies?

George Serafeim and Aaron Yoon investigate how ESG ratings moderate stock markets’ responses to ESG news in « Stock Price Reactions to ESG News: The Role of ESG Ratings and Disagreement ».

They use a large sample of daily ESG news items covering thousands of companies up to 2018 and merge it with ESG scores from three major providers (MSCI, Sustainalytics, and Thomson Reuters).

This data allows them to define a consensus rating and a disagreement metric to test whether ESG ratings predict future ESG news and whether stock price reactions depend on them.

They show:

• Firms with higher ESG scores tend to be targeted by more positive and fewer negative news events.This relationship weakens sharply for companies with high disagreement.
• The magnitude of the market reaction depends on the firm’s ESG standing: for low-rated companies, a positive event yields about +0.75% higher return than a negative one, whereas for high-rated companies the spread is only ~+0.34%.
• When there is broad disagreement among ESG raters, the market reaction to ESG news is weak or insignificant, it appears uncertain how to interpret ESG signals amid conflicting opinions.
• Conversely, when different raters largely agree, ESG news triggers much larger price moves, since investors have a clearer, unified baseline view of the company.
• The return spread between positive and negative ESG events is much larger and reaches ~2.8% for low-ESG-rated firms for issues deemed financially material to the firm’s industry.

This article shows ESG ratings are valuable for enhance sustainability news assessment, but only when they broadly concur and when sustainability issues are likely to affect fundamentals.

When raters diverge, the market fails to fully price the insight of ESG news. Good news tend to be a bigger surprise for ESG laggards, whereas for leaders much of the news is already priced in.

As a limitation, this study examines short-term market reactions and prediction of news, not long-term performance impacts, and its measure of rater disagreement is limited to three agencies.