The market power of ESG index providers: The effects of rebalancing ESG-themed indices

Roberto Barontini and Luigi Gioja

Research in International Business and Finance, 2025, vol. 77, issue PA

Abstract: This paper examines market reactions to changes in the composition of 11 MSCI ESG indices over the period 2011–2021. The results highlight the market power of ESG index providers. In summary, revisions to an index typically induce abnormal returns and abnormal trading volume, which are generally related to significant ownership changes. Abnormal trading volume is detected on the day of the effective change in the composition of the index. This is consistent with strong portfolio rebalancing. However, statistically significant abnormal returns can still be found after 30 days, especially for excluded firms. This demonstrates that composition changes can have a permanent impact on market value. Additionally, the impact is stronger in emerging markets and for heavy-polluting firms and has been more pronounced since the signing of the Paris Agreement in 2016. Both long-term and short-term institutional investors increase (reduce) their ownership in admitted (excluded) firms after the change, while strategic investors will look to reduce their equity stakes before the exclusion and then increase them once the index has been rebalanced.

Keywords: Stock index review; ESG indices; Event studies; Responsible investing (search for similar items in EconPapers)
JEL-codes: G G11 G12 G14 G23 G41 Q (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:77:y:2025:i:pa:s0275531925001588

DOI: 10.1016/j.ribaf.2025.102902

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