Firm-Level Drivers of Esg-rating divergence

Abstract

Despite their undeniable relevance for both the academic and business sphere, ESG-ratings have been proven to be diverging. This can lead to consequences on capital allocation, investment behavior, volatility in stock returns, the use of ESG-ratings and trust in ESG data while increasing the risk of greenwashing. This research examines the impact of firm size, financial profitability and average ESG-performance of firms on the extent of ESG-rating disagreement in order to provide further insight into firm-level drivers of ESG-rating divergence. The aim of this research is not to fully explain rating divergence, but rather to identify firm-level drivers as the starting point for further analysis. Using OLS regression analyses of panel data, the divergence of Bloomberg and Refinitiv scores was evaluated for the overall ESG-score as well as for every pillar dimension. Firstly, the data provides evidence on the existence of ESG-rating divergence. The findings indicate a significant reducing impact of financial profitability on the extent of disagreement. Higher rating divergence is especially associated with greater firm size within the social pillar. For the overall ESG-score even a reduction of disagreement is related to higher firm size whereas rating agency specific effects of Bloomberg and Refinitiv cannot be completely out ruled. Average ESG-performance in the current and previous period shows an increasing impact on rating divergence. The analyses underline the necessity of an increase in transparency of rating agencies’ methodologies to generate a more profound understanding of their differences and conduct more targeted analyses. Moreover, the results underline the need for standardization in definition and disclosure of ESG data.