The Economic Effects of Changes To Industry Classification Codes

This paper studies whether investors use industry classification codes as sustainability metrics. We present this hypothesis because this data is widely available and is used in sustainable finance regulations such as the EU taxonomy; investors make decisions based on mental categories, and ESG scores are often calculated with respect to the firms' industry. Using a dataset of over 9000 firms from 2010 to 2022, we show that MSCI's Global Industry Classification System (GICS) changes are generally not explained by significant changes in firms' revenue stream or M&A activity. Then, we find that firms for which GICS code changes have lower returns than similar firms. Further, using an industry-level sustainability measure based on industry weights in a broad market index and its low carbon equivalent, we find that the negative result on returns is explained by firms' moving to a browner code, while moving to a greener code does not have a negative impact.