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The Determinants of ESG Ratings: Rater Ownership Matters

Research output: Working paper

Unpublished
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Publication date6/06/2022
PublisherSSRN Working Paper
Number of pages54
<mark>Original language</mark>English

Abstract

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.