The Determinants of ESG Ratings: Rater Ownership Matters

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

Suggested Citation: Suggested Citation

Tang, Dragon Yongjun and Yan, Jiali and Yao, Yaqiong, The Determinants of ESG Ratings: Rater Ownership Matters (June 6, 2022). Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC, HKU Jockey Club Enterprise Sustainability Global Research Institute - Archive, Available at SSRN: https://ssrn.com/abstract=3889395 or http://dx.doi.org/10.2139/ssrn.3889395