Why is Corporate Virtue in the Eye of The Beholder? The Case of ESG Ratings

By Dane M. Christensen, George Serafeim, Anywhere Sikochi. Accounting Review, 2021

906 citations recorded by the source corpus.

Despite the rising use of environmental, social, and governance (ESG) ratings, there is substantial disagreement across rating agencies regarding what rating to give to individual firms. As what drives this disagreement is unclear, we examine whether a firm's ESG disclosure helps explain some of this disagreement. We predict and find that greater ESG disclosure actually leads to greater ESG rating disagreement. These findings hold using firm fixed effects, and using a difference-in-differences design with mandatory ESG disclosure shocks. We also find that raters disagree more about ESG outcome metrics than input metrics (policies), and that disclosure appears to amplify disagreement more for outcomes. Lastly, we examine consequences of ESG disagreement and find that greater ESG disagreement is associated with higher return volatility, larger absolute price movements, and a lower likelihood of issuing external financing. Overall, our findings highlight that ESG disclosure generally exacerbates ESG rating disagreement rather than resolving it.

Subfields: Accounting, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/1b013ce176a4a433f2ac103c358783bde1cad1fb

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Citations in the corpus

Mandatory CSR and sustainability reporting: economic analysis and literature review (2019, background): “For instance, Christensen et al. (2021) find that ESG disclosures generally exacerbate rather than resolve ESG rating disagreement and that this disagreement is associated with higher price volatility and a lower likelihood of external financing.”
Corporate Sustainability and Stock Returns: Evidence from Employee Satisfaction (2020, positive): “We use MSCI ESG Ratings because it is not only the largest ESG data provider to the investment community (Christensen, Serafeim, and Sikochi, 2019), but also gives us the most number of firm-years when merged with our Glassdoor data when compared with Sustainalytics and Thomson Reuters Asset4.”
Divergent ESG Ratings (2020, background): “Christensen, Serafeim, and Sikochi (2019) provide additional insights on rater disagreement.”
Aggregate Confusion: The Divergence of ESG Ratings (2020, positive): “We extend existing research that has documented the divergence of ESG ratings (Chatterji et al., 2016; Gibson et al., 2019; Christensen et al., 2020).”
Public Sentiment and the Price of Corporate Sustainability (2020, background): “Moreover, given evidence that various data providers disagree in their assessments of ESG Performance scores (Berg, Koelbel, and Rigobon 2019; Christensen, Sikochi, and Serafeim 2019), future research could examine how the results differ when different ESG data are used.”