Decoding market reactions: Analysis of divergent signals of ESG ratings

This study examines how ESG ratings influence investor behavior, emphasizing the variations across rating agencies. Using daily market reactions in returns and trading volumes of 1100 North American and European firms from 2017 to 2023, the analysis identifies variations in market reactions between ESG score changes from Bloomberg and MSCI. Notably, abnormal trading volumes without abnormal returns point to two types of market ambiguity - uncertainty and disagreement - affecting ESG-related price signals. The findings underscore the need to reduce investor ambiguity to enhance market efficiency, with potential roadblocks being the limited availability, divergence, and unclear materiality of ESG information. • This study identifies a reaction divergence across ESG rating disclosures from different raters. • Reaction divergence is defined as differences in market-level outcomes. • Reaction divergence may be driven by 2 forms of ambiguity: investor uncertainty and disagreement. • There is a need for greater transparency, standardization, and ‘democratization’ of ESG ratings.