Changes of ESG ratings of publicly traded companies do not have an impact on companies’ stock performance in the short term, according to a new study conducted by researchers at the University of Kassel in Germany.
The researchers used ESG ratings from Vigeo Eiris and MSCI to achieve robust results included in the study titled ’Rating changes revisited: New evidence on short-term ESG momentum’.
“Both datasets (VigeoEiris and MSCI) contain ESG ratings from US companies. First, we calculated changes in those ESG ratings for each company from one month to the next. Then we assigned each stock to an upgrade, downgrade or a control portfolio, based on a positive, negative or no change in a company’s ESG rating,” Maurice Dumrose, one of the five authors of the study, told IPE.
He added: “We applied a factor model approach to investigate the risk-adjusted return of each of those portfolios, and we found that rating changes do not relate to a short-term, one-month, financial performance.”
The Kassel University’s research overturns the findings of an analysis conducted by Savva Shanaev and Binam Ghimire of the Northumbria University in Newcastle, investigating the impact of 748 ESG rating changes by MSCI on stock returns of US companies over the period 2016-21, looking at the month after the rating change takes place, also called calendar-time portfolio methodology.
The Northumbria University study found that ESG rating upgrades have a positive impact on returns of 0.5% per month, while downgrades lead to statistically significant monthly risk-adjusted returns of -1.2% on average.
The findings are more pronounced for ESG leaders than laggards and are robust to various asset-pricing model specifications, it said.
Researchers at the Kassel University have underlined in their study theoretical and methodological flaws of the analysis conducted by Shanaev and Ghimire, including the assumption that a large share of investors monitor MSCI ESG ratings on a monthly basis and rebalance their portfolios ad hoc.
According to latest research, it is unlikely that investors closely look at rating changes on a monthly basis because negative performances persist.
“Based on our results, we conclude that a majority of asset managers do not directly, ad hoc, incorporate those ESG rating changes in their investment decisions,” Dumbrose said, adding, however, that the results of the their study do not provide information on the financial relevance of ESG ratings or rating changes in the medium to long run.
Moreover, looking at current research examining 3,665 US companies and 4,679 MSCI ESG rating changes from 2013 to 2020, the Northumbria University research does not cover all MSCI ESG rated US companies, with data on returns of 474 companies, despite claiming to analyse 658 US companies, according to the latest research.
Relatively recent studies have observed low correlations between ESG ratings from various providers, meaning that the ESG rating of one company may not replicate across rating providers.
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