We investigate the relationship between ESG rating divergence and stock returns from an investor’s perspective, to explore the impact of inconsistency among ESG rating agencies on the capital market. We construct ESG rating divergence data using ratings from three prominent ESG rating agencies in China. Our study is based on 54,679 company-quarter observations from 2018 to 2022, which covers 4,377 Chinese listed companies. Our findings demonstrate a significant negative impact of ESG rating divergence on stock returns, which we validate through a series of robustness tests and endogenous analyses. Notably, we find that investors’ expectations mediate the relationship between ESG rating divergence and stock returns. Further analyses show that only the divergence in social ratings have a significant inhibitory effect on stock returns. In addition, ESG rating divergence significantly impedes subsequent average ESG ratings. The adverse relationship between ESG rating divergence and stock returns is particularly pronounced in non-heavy pollution companies, non-state-owned companies, and companies with lower external attention.

This paper explores the relationship between ESG rating disagreement and the stock price crash risk. Using 2011-2020 Chinese A-share listed companies in Shanghai and Shenzhen as research sample, the empirical test results show that ESG rating disagreement significantly increases the stock price crash risk. The mechanism tests find that ESG rating disagreement influences the stock price crash risk by undermining corporate information transparency and increasing the level of investor sentiment. The findings of this paper reveal the potential negative economic consequences of ESG rating disagreement and enrich the research on the influencing factors of stock price crash risk, which contribute to the prevention of possible financial risk and the sustainable development.

Unlike equity analysis where analysts follow a small group of firms and exercise discretion in incorporating firm-specific knowledge, 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. Against this backdrop, 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 relationship-based 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.

We study how multinational companies may propagate Environmental, Social, and Governance (ESG) practices through subsidiaries in foreign countries with stricter ESG policies. Using staggered regulatory changes in a host country’s ESG strictness as an exogenous shock, we find that multinational firms with subsidiaries in countries that increased ESG strictness would significantly increase their R&D investments, build more green inventions in domestic operations, and have higher ESG ratings. Cities with more multinationals exposed to foreign ESG regulatory changes experience a greater reduction in air pollutant emissions. Our results are consistent with the argument that multinationals promote and propagate ESG practices across countries, likely to sustain access to finance in a foreign country with high ESG standards.

This paper explores the relationship between ESG ratings and real earnings management using the data of Chinese listed companies from 2008 to 2021. We find that ESG ratings and real earnings management are negatively correlated. It reveals that the improvement of ESG rating will help to improve the level of corporate governance, standardize the business activities of enterprises and thus help to reduce the real earnings management of enterprises. Our findings still hold after controlling for potential endogeneity and robustness issues. Further analysis shows that internal and external oversight of companies further strengthens the negative relationship between ESG ratings and true earnings management. Overall, the impact mechanism of ESG rating on real earnings management revealed by us has clear policy implications for how managers can improve the quality of information disclosure in emerging markets.

With growing awareness of sustainability, the field of Environmental, Social and Governance (ESG), has been attracting mainstream investors and researchers. Many previous studies have found inconclusive or mixed results on the relationship between ESG ratings and firms’ financial performance, which are mainly attributed to their varied markets, time horizons, and sources of ESG rating. Based on evidence from an emerging market, namely China, this paper examines whether ESG is an adequate indicator for firms’ future financial performance. Given the divergence in ESG rating methodologies, we use ESG data from two ESG rating agencies, one based in China (SynTao) and the other based in Switzerland (RepRisk), for robustness. Specifically, we investigate 377 China A-share companies covered by both agencies and find that ESG rating, albeit divergent due to disparate methodologies, is instrumental in predicting the trend of corporate financial performance (CFP). This work verifies that the forward-looking nature of ESG makes it crucial for firms’ long-term valuation and financial performance in emerging markets. Throughout the research, we observe four issues in the current ESG rating process: the opacity and inaccessibility of source data, the obscurity of ESG rating methodologies adopted by rating agencies, the lack of automated pipeline, and the unannounced historical data rewriting. We believe that the public blockchain ecosystem is promising to address these issues, and we propose future research on the ESG framework for blockchain to call for sustainability focus on this emerging technology.