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

The Accounting Review, https://doi.org/10.2308/TAR-2019-0506

64 Pages Posted: 12 Apr 2021 Last revised: 19 Aug 2021

See all articles by Dane M. Christensen

Dane M. Christensen

University of Oregon

George Serafeim

Harvard Business School

Anywhere (Siko) Sikochi

Harvard University - Business School (HBS)

Date Written: February 26, 2021

Abstract

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.

Keywords: ESG Ratings, Rating Agency Disagreement, ESG Disclosure, Corporate Social Responsibility, Sustainability

JEL Classification: G24, M14, M41, Q56

Suggested Citation

Christensen, Dane M. and Serafeim, George and Sikochi, Anywhere, Why is Corporate Virtue in the Eye of the Beholder? The Case of ESG Ratings (February 26, 2021). The Accounting Review, https://doi.org/10.2308/TAR-2019-0506, Available at SSRN: https://ssrn.com/abstract=3793804

Dane M. Christensen (Contact Author)

University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

George Serafeim

Harvard Business School ( email )

Boston, MA 02163
United States

HOME PAGE: http://www.hbs.edu/faculty/Pages/profile.aspx?facId=15705

Anywhere Sikochi

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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