New Schulich Study Finds Blind Reliance on ESG Ratings Can Lead to Stock Mispricing
TORONTO – Tuesday, June 9, 2026 – New research from York University’s Schulich School of Business finds that investors who rely on environmental, social and governance (ESG) ratings without fully understanding how they are constructed can contribute to stock mispricing and market inefficiencies.
The study, “Investor Reliance on ESG Ratings and Stock Price Performance”, was recently published in Management Science, one of the world’s leading business research journals. The paper was co-authored by Aleksandra Rzeźnik, Assistant Professor of Finance at Schulich, together with Kathleen Weiss Hanley and Loriana Pelizzon.
Using a change in ESG rating methodology introduced by Sustainalytics, the researchers examined how investors reacted when the revised ratings were made publicly available through Morningstar and Yahoo! Finance. They found that many retail investors misunderstood the change and interpreted movements in the ratings as improvements or deteriorations in companies’ ESG performance, even though the changes largely reflected a revised methodology and an inversion of the rating scale.
“Our findings show that ESG ratings are highly influential and can have a meaningful impact on stock prices,” said Rzeźnik. “But they also demonstrate the risks of blindly relying on ratings without understanding how those ratings are constructed.”
The study found that less sophisticated investors tended to treat higher ratings as inherently positive and lower ratings as negative, regardless of whether the change reflected new information about a company’s ESG risk profile. These misinterpretations created temporary price distortions in affected stocks.
“Many individual investors appeared to react to the ratings themselves rather than to the underlying information,” said Rzeźnik. “In some cases, they interpreted changes that were purely methodological as signals about a company’s ESG performance.”
The researchers also found that more sophisticated market participants, including institutional investors and short sellers, recognized these misinterpretations and often traded in the opposite direction, helping prices eventually return to their fundamental values.
The findings have important implications for policymakers and regulators as governments and international bodies consider new rules governing ESG rating providers.
“As ESG investing continues to grow, transparency around rating methodologies becomes increasingly important,” said Rzeźnik. “Clearer disclosures and greater comparability across rating providers could help reduce investor confusion and improve market efficiency.”
The paper contributes to a growing body of research examining the role of ESG factors in capital markets and offers new evidence that ratings themselves, independent of underlying fundamentals, can influence investor behaviour and stock returns.
