ESG Ratings of ESG Index Providers

54 Pages Posted: 4 Jun 2023 Last revised: 15 Sep 2023

See all articles by Sonakshi Agrawal

Sonakshi Agrawal

Columbia University - Columbia Business School

Lisa Yao Liu

Columbia Business School

Shivaram Rajgopal

Columbia University - Columbia Business School, Accounting, Business Law & Taxation

Suhas A. Sridharan

Emory University - Goizueta Business School

Yifan Yan

Emory University - Goizueta Business School

Teri Lombardi Yohn

Emory University Goizueta Business School

Date Written: September 7, 2023

Abstract

Despite growing investor reliance on environmental, social, and governance (ESG) ratings, we know relatively little about how such ratings are constructed especially because widespread disagreement across ESG ratings raises concerns about their credibility. At the same time, several leading ESG raters not only construct ESG ratings but also market index products based on their ESG ratings. We examine whether the incentives associated with deriving revenue from ESG rating-based indices contribute to the variation in ESG ratings. Consistent with this notion, we find that raters with strong index licensing incentives issue higher ESG ratings for firms with better stock return performance and those added to their ESG indexes, compared to raters with weaker licensing incentives. The results hold after accounting for the firm’s fundamental ESG performance and different rating methodologies. Overall, our findings suggest that index construction incentives affect the production of ESG ratings, highlighting the need for greater transparency in the production of ESG ratings.

Keywords: ESG, index providers, rating agencies, sustainability, disclosure

JEL Classification: G24, M14, M40, M41, M48, Q56

Suggested Citation

Agrawal, Sonakshi and Liu, Lisa Yao and Rajgopal, Shivaram and Sridharan, Suhas A. and Yan, Yifan and Yohn, Teri Lombardi, ESG Ratings of ESG Index Providers (September 7, 2023). Columbia Business School Research Paper No. 4468531, Available at SSRN: https://ssrn.com/abstract=4468531 or http://dx.doi.org/10.2139/ssrn.4468531

Sonakshi Agrawal

Columbia University - Columbia Business School

Lisa Yao Liu (Contact Author)

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Shivaram Rajgopal

Columbia University - Columbia Business School, Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

Suhas A. Sridharan

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

Yifan Yan

Emory University - Goizueta Business School

Teri Lombardi Yohn

Emory University Goizueta Business School ( email )

201 Dowman Drive
Atlanta, GA 30322
United States

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