The Determinants of ESG Ratings: Rater Ownership Matters
59 Pages Posted: 22 Jul 2021 Last revised: 22 Nov 2021
Date Written: November 19, 2021
Environmental, social, and governance (ESG) ratings are increasingly popular in financial markets and for policy making. We show that firms held by the same investors who own the rater (“sister firms”) receive higher ESG ratings. Exogenously created sister firms through acquisitions provide causal inference for the ownership effect. 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 suggest that the quality of ESG ratings can be undermined by conflicts of interest and have important implications for practitioners and regulators.
Keywords: ESG, Rating agencies, Conflicts of interest, Ownership structure
JEL Classification: G32, L32, M14
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