ESG Rating Score Revisions and Stock Returns

We analyze the impact of ESG rating score revisions on stock returns for U.S.-listed firms. Using holding periods of six months, we find that decreases in rating scores are followed by annualized negative abnormal returns of approximately 3%. These results are mostly due to large ESG score decreases and decreases in the environment score. We find no evidence for a short-term effect of rating revisions. Instead, our evidence is consistent with a medium-run effect. First, we find that results are not driven by (unexpected) out-of-cycle revisions which are likely driven by ESG news. Second, sustainable index revisions, which occur quarterly, partly drive the effect of rating revisions. Third, especially long-term institutional investors decrease their holdings after a decrease in the rating score. Likely, it is not solely investors' non-pecuniary motives that drive these results, because we find that revisions in rating scores predict subsequent changes in operating performance and systematic risk