ESG Ratings of ESG Index Providers

MSCI, widely considered the largest data provider to the ESG investment community, sells ESG ratings for companies and constructs its own ESG indexes based on such ratings. Such ESG indexes underlie the creation of several ESG ETFs (exchange traded funds) or mutual funds. Motivated by such nexus, we find that MSCI’s ESG ratings are systematically higher (lower) than that of its competitors (FTSE Russell and Refinitiv) for stocks added (dropped) from MSCI’s ESG indexes, after controlling for differences in ESG ratings of MSCI and its stated peers. We then investigate whether such upgrades and downgrades reflect information about ESG fundamentals. It turns out that leading and lagging monthly stock returns, which are not ESG issues in our opinion, are systematically higher (lower) for firms added or dropped by MSCI from its ESG indexes. Moreover, MSCI’s ESG ratings upgrades and downgrades, relative to peers, do not appear to be informative about “fundamental” ESG performance, such as regulatory violations against stakeholders. We do not find evidence that competitors’ ESG ratings converge with MSCI’s ESG ratings. Notably, the anomalies we document are not found for FTSE, another prominent index and ESG rating provider