Global vs. Local ESG Ratings: Evidence from China

46 Pages Posted: 27 Dec 2022 Last revised: 31 Dec 2022

See all articles by Jeff Zeyun Chen

Jeff Zeyun Chen

Texas Christian University

Zengquan Li

Shanghai University of Finance and Economics - School of Accountancy

Ting Mao

The Chinese University of Hong Kong

Aaron Yoon

Northwestern University - Department of Accounting Information & Management

Date Written: December 16, 2022

Abstract

ESG ratings that intend to capture firm ESG risk are produced through a largely unified model that incorporates a set of common disclosures decided by each rater. We assess the ability of local and global ESG ratings in capturing covered firms’ ESG risk in China. We use firm-level negative ESG incidents that occur within a year of ESG ratings’ release as a proxy for raters’ ESG risk assessment and examine whether local and foreign ratings have differential predictive ability. We find that local ratings better capture ESG risk that relates to social and governance issues on corruption, employment conditions, and regulatory violations, which often require the local context to incorporate. The outperformance is also salient among firms that rely on relationshipbased transactions and political connections. Our results suggest that the local rater uses local knowledge to inform its model, which makes the ratings more relevant to ESG risk.

Keywords: ESG Ratings; ESG Risks; Global vs Local; China

JEL Classification: G14, M4

Suggested Citation

Chen, Jeff Zeyun and Li, Zengquan and Mao, Ting and Yoon, Aaron, Global vs. Local ESG Ratings: Evidence from China (December 16, 2022). Available at SSRN: https://ssrn.com/abstract=4304850 or http://dx.doi.org/10.2139/ssrn.4304850

Jeff Zeyun Chen

Texas Christian University ( email )

2900 Lubbock Ave
Fort Worth, TX 76109
United States

Zengquan Li

Shanghai University of Finance and Economics - School of Accountancy ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

Ting Mao

The Chinese University of Hong Kong ( email )

Aaron Yoon (Contact Author)

Northwestern University - Department of Accounting Information & Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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