We find that ESG rating upgrades lead to an increase in firms’ ownership by funds with an explicit ESG strategy and increased buy-and-hold returns over a window of up to two years. We find the opposite effect for downgrades. Regarding impact on the real economy, we find no evidence indicating that firms’ growth is affected by ESG rating changes. We do find that firms improve their governance practices in response to downgrades, but not their social or environmental practices...