ESG downgrades were associated with weaker share-price performance than upgrades in a study of more than 6,000 rating changes at S&P 500 companies. The gap became wider when the surrounding flow of ESG news was unusually positive, suggesting that disappointment matters as well as the downgrade itself.
A company with a strong environmental, social and governance record may enjoy greater investor confidence. However, that reputation also raises the standard against which the next piece of news is judged.
Researchers Ngoc Phu Tran, Ariful Hoque and Thi Le examined Refinitiv ESG score changes between 2010 and 2024. Their peer-reviewed study was published in the International Review of Economics & Finance.
The main finding was asymmetric. Downgrades were followed by economically meaningful negative abnormal returns, while the response to upgrades was weaker and faded sooner.
How the researchers measured the market response
ESG ratings combine assessments of a company’s environmental record, its treatment of workers and other stakeholders, and the way it is governed. A higher or lower score can therefore reflect many different changes, from emissions and workplace safety to board oversight.
The researchers identified company-specific changes in Refinitiv ESG scores. To reduce the risk of counting a cluster of related revisions several times, they kept only the first change within any 90-day period. Events that coincided with mergers, stock splits or bankruptcy filings were excluded.
The descriptive sample contained 6,241 rating events. The main regression analysis used 5,852 after allowing for the availability of the financial and sentiment variables.
The study measured cumulative abnormal returns, usually shortened to CARs. An abnormal return is the difference between a share’s actual return and the return that a market model would normally predict. Adding those differences across several trading days produces a cumulative abnormal return.
This matters because a share-price fall does not necessarily reflect company-specific news. If the entire market has fallen, part of the decline may have little to do with an ESG decision.
After company controls and industry and year effects were included, downgrades were associated with CARs about 0.8 percentage points lower than upgrades over the seven trading days before and after the rating change. The gap widened to about 2.0 percentage points over the 14 days before and after it.
Those figures are relative differences between downgrades and upgrades within the model. They are not a prediction that every downgrade will reduce a company’s market value by the same amount.
Why optimism made the downgrade more painful
The researchers did not treat investor sentiment as a single measure. They used firm-specific news and social-media data from Refinitiv MarketPsych Analytics and separated it into positive tone, negative tone, risk, volatility and management-related sentiment.
Positive sentiment was the clearest factor affecting the downgrade response. When ESG-related coverage of a company was more optimistic, a subsequent downgrade was associated with a more negative abnormal return. The interactions involving negative, risk, volatility and management sentiment did not show the same consistent pattern.
“Investors appear to punish ESG downgrades most severely when they contradict an otherwise positive view of the firm,†Hoque said in Murdoch University’s account of the research.
The result is consistent with an expectations effect. Investors who already expect little from a company may regard another weak signal as confirmation. A downgrade at a company surrounded by favourable coverage forces them to revise a more optimistic view.
One qualification matters here. The study cannot determine whether investors were correcting an irrationally high valuation or making a rational reassessment of future cash flows and risk. The authors explicitly say their design does not fully separate those two explanations.
A strong ESG score and positive sentiment are not the same thing
The detailed results add a useful distinction that can be lost in a simple “higher hopes, harder fall†headline.
Companies with high ESG scores suffered a substantial downgrade penalty regardless of whether positive sentiment was elevated. In the study’s split-sample analysis, downgrades at high-ESG companies were associated with CARs about 3 percentage points lower in both event windows. The additional interaction with positive sentiment was not statistically significant.
Among companies with lower ESG scores, the downgrade on its own was not statistically significant. It became more damaging when the surrounding sentiment was positive.
Company size produced a different pattern. Positive sentiment intensified the downgrade response among larger companies, particularly in the longer window, while the same interaction was not statistically significant among smaller companies.
This suggests two related routes to disappointment. A strong previous ESG score can make the downgrade itself more consequential. Separately, a favourable information climate can increase the distance that investors’ expectations have to fall.
An ESG downgrade is not a universal verdict
The study used changes in one provider’s scores, Refinitiv. That is worth remembering because ESG rating agencies do not always reach the same conclusion about a company.
A separate study of six prominent rating systems found pairwise correlations ranging from 38% to 71%. Differences in measurement explained 56% of the divergence, while differences in scope explained 38% and weighting choices accounted for 6%.
A rating change is therefore a signal produced by a particular methodology, rather than a single objective verdict shared by every provider. Investors need to ask what changed, which part of ESG was affected and whether the provider altered its data or methodology.
Regulators have started paying closer attention to this issue. The European Union’s ESG Ratings Regulation began applying on 2 July 2026. It introduces authorisation, supervision and disclosure requirements for providers serving the EU market. The rules are intended to make rating methods and conflicts of interest more transparent, but they do not require every provider to produce the same score.
The new study is also limited to large US companies and short periods around Refinitiv score changes. Other company news can still occur within those windows, and the researchers acknowledge that sentiment and market returns may influence one another.
Once a favourable ESG story becomes part of a company’s investment case, it also becomes part of the expectation built into its share price. For highly rated companies, the research indicates that the downgrade itself may be enough to trigger a material reassessment.
