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

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  • Barontini, Roberto
  • Gioja, Luigi

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.

Suggested Citation

  • Barontini, Roberto & Gioja, Luigi, 2025. "The market power of ESG index providers: The effects of rebalancing ESG-themed indices," Research in International Business and Finance, Elsevier, vol. 77(PA).
    • Handle: RePEc:eee:riibaf:v:77:y:2025:i:pa:s0275531925001588
    DOI: 10.1016/j.ribaf.2025.102902
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    More about this item

    Keywords

    Stock index review; ESG indices; Event studies; Responsible investing;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G - Financial Economics
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics

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