The Determinants of ESG Ratings: Rater Ownership Matters
54 Pages Posted: 22 Jul 2021 Last revised: 6 Jun 2022
Date Written: June 6, 2022
Environmental, social, and governance (ESG) ratings are widely used in practice but lack evidence of their underpinning. We find that firms sharing the same major shareholders with the rater (“sister firms”) receive higher ESG ratings. We make causal inference for the ownership effect by exploiting an acquisition event that created sister firms exogeneously. Sister firms receive higher ratings when the common owners have larger stakes in the ESG rater. Notwithstanding their initial higher ratings, sister firms have poorer future ESG outcomes. These findings cast doubt on the quality of ESG ratings and caution practitioners and regulators.
Keywords: ESG, Rating agencies, Conflicts of interest, Ownership structure
JEL Classification: G32, L32, M14
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