When looking for equity investments, how do changes in a company’s environmental, social and governance profile impact its stock price?

This month, MSCI released a report called How Markets Price ESG, which found that changes in a companies’ ESG profile have been predictive of changes in stock prices.

The study also found that equity markets reacted most to ESG changes for companies without extreme ESG scores.

Guido Giese, executive director of applied equity research at MSCI says that once a company is rated very good or very bad, small changes don’t matter as much because investors have made their decisions already. He also says that the majority of companies have scores in the middle, so when they start to move one direction or the other that is a differentiating piece of information.

“Once a company has a very high rating it also doesn’t have much room anymore to improve, so there is, of course, less movement to the upside once you are in the upper bucket and there’s also less room to move once you’re on the lower end of the scale,” Giese says.

The MSCI study also found that companies reacted more strongly when there were improvements to ESG characteristics compared to declines.

Giese says investors likely reacted more strongly to positive news because it’s probably more of a buying signal than a selling signal.

Giese also says that when it comes to timing, stock prices react most strongly over one year.

“Basically, whatever change in corporate governance and ESG profile there is, the markets they process it and put it into the share price within a year and after two years there’s relatively little left that the market hasn’t priced yet.”