Analysis of more than 6,700 S&P 500 ESG rating changes suggests companies with strong sustainability reputations can face a greater market backlash when their scores deteriorate.
Companies can suffer sharper share-price declines after an ESG rating downgrade when investors already hold strongly positive expectations about them, according to new research examining more than a decade of sustainability ratings and stock-market performance.
RELEVANT SUSTAINABLE GOALS
Researchers at Australia’s Murdoch University analysed more than 6,700 environmental, social and governance rating changes among S&P 500 companies between 2010 and 2024, comparing those changes with subsequent market performance.
They found that ESG downgrades were followed by economically meaningful negative cumulative abnormal returns. Upgrades, by comparison, generated much weaker and shorter-lived market responses.
The difference was particularly pronounced when a company was surrounded by positive sentiment.
The findings point to a financial consequence of high expectations: businesses that have earned investor confidence, including through strong ESG records, may have further to fall when their sustainability performance unexpectedly deteriorates.
Positive Investor Sentiment Magnifies the ESG Downgrade Effect
The researchers set out to examine whether investor attitudes toward individual companies changed the way markets reacted to ESG rating revisions.
“We wanted to investigate whether investor sentiment towards a firm influenced how the market reacted to ESG rating changes,” said Phu Ngoc Tran, a lecturer at Murdoch Business School and lead author of the study.
Using company-specific news and social media data, the researchers divided investor sentiment into five categories: positive tone, negative tone, risk, volatility and management-related sentiment.
Positive sentiment emerged as the most influential factor in determining the market reaction to a downgrade.
“What surprised us was that positive sentiment had a much greater influence than other forms of investor sentiment, such as fear, risk, or concerns about a firm’s management,” said Ariful Hoque, a senior lecturer at Murdoch Business School and co-author of the study.
Measures of negative sentiment, risk, volatility and perceptions of management played comparatively limited roles in determining how stock prices responded.
When Good Expectations Collide With Bad ESG News
The results suggest that the market response is shaped not simply by whether an ESG rating moves up or down, but by what investors expected before the change occurred.
Negative ESG information can have a stronger impact when it conflicts with an already favourable view of a company.
“Our findings show that the same ESG downgrade can have very different market impacts depending on investor expectations at the time.”
That relationship helps explain why downgrades produced more significant responses than upgrades in the companies studied.
For investors, the findings suggest an ESG rating change should be considered alongside prevailing expectations about the business rather than interpreted in isolation.
Large Companies and ESG Leaders Have More to Lose
The effect was strongest among large companies and businesses that had strong ESG records before being downgraded.
“Large companies and those with strong ESG reputations appear to have the most to lose from an ESG downgrade, as these firms attract greater investor attention and higher expectations,” Hoque said.
The researchers said these businesses are also more likely to be widely owned by institutional investors and investment funds operating under ESG mandates.
That ownership could potentially intensify the market reaction when a company’s sustainability performance weakens.
The finding carries particular significance for businesses that have invested heavily in building reputations around environmental, social and governance performance.
A Strong ESG Reputation Does Not Eliminate Market Risk
ESG ratings are produced by specialist providers that assess companies across issues ranging from carbon emissions and governance to labour practices.
Their use has become widespread among investors as sustainability considerations have taken a greater role in decisions about where capital is allocated.
A strong ESG history, however, may create its own vulnerability if subsequent performance falls short of expectations.
“Firms that have built a strong ESG reputation should not assume they are insulated from market risk,” Tran said.
The study therefore presents corporate sustainability reputation as something that can raise expectations as well as strengthen investor perceptions.
The findings arrive as sustainable investing remains a substantial part of global finance despite recent political and investor resistance to ESG.
Global sustainable funds held an estimated US$3.7 trillion in assets at the end of the second quarter of 2026, according to Morningstar.
Assets reached a record even as investor demand differed sharply among regions.
In the United States, sustainable funds recorded nearly US$3 billion in net inflows during the quarter. It was their first positive quarter following 14 consecutive quarters of withdrawals.
The size of the sustainable investment market means changes in corporate ESG assessments continue to carry relevance for companies and the investors holding them.
ESG Ratings Still Lack a Common Standard
One complication is that ESG ratings themselves are not standardised.
Different providers can reach substantially different assessments of the same company.
A study comparing six major rating agencies found correlations among their ESG assessments ranging from 0.38 to 0.71.
Differences in how rating providers measured sustainability factors accounted for more than half of that divergence.
Previous research had already connected ESG rating downgrades with declining share prices. The Murdoch University study adds another dimension by examining how investor sentiment can alter the strength of that relationship. Its findings suggest that expectations matter considerably.
For companies, building a strong sustainability reputation can attract investor confidence, but that confidence also raises the consequences when ESG performance deteriorates. For investors, the research suggests that a rating downgrade cannot tell the whole story on its own. How the market viewed the company beforehand can help determine how hard the shares are ultimately hit.
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