A Global Event Study of the Announcement Effect of Changes in MSCI ESG Ratings

Abstract

This master's thesis investigates the short-term announcement effect of changes in companies’ ESG ratings from MSCI ESG Direct Ratings in 2024 on the global stock market. An event study using the Market Model is conducted on 6,762 publicly listed companies across 62 countries, analysing the average market reaction to upgrades, downgrades, unchanged ratings, and newly added ESG ratings across a primary event window of three trading days [-1; 1] and six extended event windows. The analysis is further supported by four cross-sectional regressions and qualitative expert interviews to aid in the interpretation of the findings. The cross-sectional regressions are conducted to examine whether overall ESG scores and the three individual ESG pillar scores influence the magnitude of abnormal returns. The results indicate that upgrades are associated with a weakly significant negative abnormal return, while downgrades and unchanged ratings do not trigger any significant market reaction. In contrast, a strongly significant negative effect is identified for companies receiving a newly added rating in the extended event windows—particularly for those categorised as Laggard. Moreover, the thesis finds no significant differences in announcement effects across geographical regions. Multiple explanations for the observed patterns are proposed. First, the absence of significant market reactions to rating changes may stem from 1) the short event window, 2) ESG ratings often function as lagging indicators, and 3) the ESG divergence phenomenon. On the contrary, the significant market response to the introduction of a first-time rating may be attributable to the closing of information gaps, shaped by firm-specific and regional factors. Overall, the findings document that the information value of ESG ratings is not uniform but depends on the nature and context of the rating change.