Non-Financial Reporting, Double Materiality, and Business Model Evaluation: An Empirical Study of ESG Ratings in Europe

Environmental, social, and governance (ESG) investing is becoming mainstream, and the COVID-19 pandemic has amplified the momentum. The interest in ESG investing creates greater demand for ESG data, ratings, and rankings, spawning a proliferation of agencies offering these products, which investors, academics, and regulators rely on unquestioningly. Research highlights that different ESG ratings and rankings produce significantly different assessments of the ESG performance of companies. This article examines the causes of differences in the ratings and rankings generated by different agencies. Findings indicate that the divergences among raters can be attributed to differences in the definitions of ESG constructs (i.e., a theorization problem) and methodological differences (i.e., a commensurability problem). While users of ESG ratings and rankings are advised to study the definitions and methodologies before their use, a lack of transparency about the data sources, weightings, and methodologies makes it difficult to ensure that companies’ true ESG performance is accounted for when making portfolio selection and investment decisions. As a solution, the article notes that instead of attempting to compare and contrast ratings and rankings of different agencies, investors should determine the ESG constructs that are material to their own investment strategies and then match them with an ESG rating or ranking product that closely resembles those constructs. <b>TOPICS:</b>ESG investing, information providers/credit ratings, portfolio construction, portfolio theory <b>Key Findings</b> ▪ There are significant divergences among the ratings and rankings provided by different ESG rating agencies. ▪ Differences among various ESG ratings and rankings are caused by differences in the definitions of ESG constructs (i.e., a theorization problem) and differences in the methods applied for measuring ESG performance of companies (i.e., a commensurability problem). ▪ Agencies providing ESG ratings and rankings are not transparent about what constitutes ESG performance and how ESG performance is measured, including information sources used. ▪ Theorization, commensurability, and transparency problems contribute to masking the true ESG risks and the performance of companies.

This thesis analyizes the role of corporate social responsibility (CSR) information in capital markets and its use by stakeholders and information intermediaries. On the basis of three studies, the thesis contributes to two streams of literature: literature on the role of ESG and governance ratings in capital markets and literature on real effects following mandatory CSR transparency. In the first study, we examine whether and how information reflected in corporate governance ratings is valuable for investors and how these informational properties of governance ratings vary across institutional settings. For a global sample of firms, we document a positive association between the Corporate Governance Quotient, a commercial rating marketed by ISS, and Tobin’s Q. We show that this positive association derives from both ISS’s information selection and collection skills (public information component) as well as their proprietary technology and access to private information (technology component). This finding helps explain the observed importance of governance rating agencies to investors. Digging further, we find that the observed relation holds exclusively for firms located in the US. We discuss potential explanations for this finding. In the second study, I shed light on the economic role of environmental, social, and governance (ESG) ratings, the dynamics of the rating market, and the quality and potential challenges of (ESG ratings. The relevance and use of ESG ratings have increased significantly, with large capital flows following ESG ratings. ESG rating providers function as information intermediaries that can reduce information processing costs and coordinate capital flows according to ESG criteria. Based on a review of literature central to the debate, I find that empirical evidence on the economic role is mixed with varying predictive abilities regarding financial outcomes or better ESG performance. Main challenges of ESG ratings relate to a lack of a common definition of ESG, data availability and quality, the convergence across raters, and rating validity that is hard to assess. Regulatory efforts like the European Union’s Corporate Sustainability Reporting Directive (CSRD: Directive 2022/2464/EU) and the current proposal targeting rating providers (EU 2023/0177/COD) might be able to address some of these issues. In the thrid study, we examine whether and how non-governmental organizations (NGOs) react to a mandated increase in corporate social responsibility (CSR) information. We exploit the implementation of the EU’s Non-Financial Reporting Directive (NFRD: Directive 2014/95/EU) using a difference-in-differences design combined with further cross-sectional analyses. Results show that NGOs step up their campaigning activity in the EU following the first-time publication of mandatory CSR reports. Additionally, we observe a concurrent shift in campaign topics towards more NFRD-related concerns in campaigns targeting EU firms. Our findings are potentially important to (EU) regulators who rely on stakeholder pressure to accomplish the desired goals via a CSR transparency mechanism.

With the development and proliferation of sustainable investing, ESG ratings have gradually become an important basis for measuring corporates’ ESG performance and influencing investors to make investment decisions. However, the validity of ESG ratings has also raised public concerns due to the differences in the evaluation systems and standards of ESG rating agencies. This paper analyzes the effectiveness of ESG rating data provided by Chinese rating agencies in terms of retrospective and predictive effectiveness. It assesses how well these data reflect the past ESG performance of Chinese companies and its ability to predict future ESG performance. The study focuses on China Securities Index 300 companies from 2016 to 2020 and benchmarks their ESG ratings against five indicators derived from negative events. Through regression analysis, this paper studies the association between these indicators and ESG ratings. The results indicate that domestic ESG ratings in China can capture the past ESG performance of Chinese companies, but they can only partially predict the future ESG performance.

ABSTRACTThe increasing number of ESG‐linked financial instruments demonstrates the need for reliable information on companies' ESG performance, which is a challenge for users. Debates surround the effects of reliability‐enhancing instruments like corporate social responsibility (CSR) report assurance and environmental, social, and governance (ESG) rating services on decisions related to ESG‐linked financial instruments. Using experimental evidence from 156 bank managers, we show that assurance positively impacts ESG‐linked credit lending decisions, with an additional positive impact when a neutral ESG rating is present in conjunction. When ESG performance and ESG rating improve, reasonable assurance can further amplify this positive effect. Additionally, our research indicates that the implementation of a positive ESG rating positively influences ESG‐linked credit lending decisions, irrespective of any assurance factors. These findings have various implications, as they draw attention to the decision‐making relevance of CSR report assurance and ESG ratings, as well as the understanding of assurance levels.

The growing integration of Environmental, Social, and Governance (ESG) factors into corporate decision-making and investment strategies has heightened the need for reliable and comparable ESG ratings. However, substantial divergence across rating agencies—driven by inconsistent methodologies, weighting schemes, and disclosure practices—poses challenges for investors, firms, and regulators. Addressing a key gap in the literature, this study investigates how regulatory environments influence ESG rating divergence by comparing hard, soft, and unregulated frameworks across five major economies: the United States, China, Japan, Germany, and India. ESG ratings were collected from Sustainalytics, S&amp;P Global, and Refinitiv for the top 50 publicly listed companies in each country. The divergence was measured using absolute score differences between agencies, and statistical tests and cluster analysis were conducted to evaluate the impact of regulation on rating consistency. The results indicate that countries with strong, mandatory ESG disclosure regimes—such as Germany's CSRD and India’s BRSR—exhibit significantly lower levels of rating divergence, while unregulated markets like the USA and China display the highest discrepancies. Notably, Japan’s soft-law approach achieves alignment levels comparable to those of hard-law environments, emphasizing the role of regulatory enforcement. These findings reinforce both signaling and agency theories by demonstrating how regulatory oversight and transparency reduce information asymmetry and promote stakeholder trust. The study highlights the importance of direct supervision of ESG rating agencies and supports global harmonization of ESG disclosure standards as a means to enhance market efficiency and comparability.

[Purpose] The purpose of this study is to analyze how corporate ESG management affects executive compensation. To achieve this, the study examines the impact of executive performance, categorized into financial performance(accounting performance and stock performance) and nonfinancial performance(ESG performance), on the sensitivity of executive compensation. [Methodology] The research sample consists of companies listed on KOSPI and KOSDAQ from 2010 to 2022, including those with and without ESG ratings. The study analyzes the relationships between accounting performance, stock performance, ESG performance, and executive compensation. Chi-square tests were conducted to examine the relationship between the presence of ESG ratings and industry distribution, and regression analysis was employed to assess the impact of various performance metrics on the sensitivity of executive compensation across different corporate samples. [Findings] First, both accounting performance and stock performance play significant roles in determining executive compensation, with the interaction between ESG performance and stock performance showing a positive influence on changes in executive compensation. Second, companies with ESG ratings place greater emphasis on financial performance when determining executive compensation, indicating that companies with higher ESG performance tend to prioritize long-term financial results. Third, in companies actively engaged in ESG management, ESG performance is indirectly reflected in executive compensation through stock performance, suggesting a close linkage between ESG performance and financial outcomes. These findings highlight the necessity of incorporating ESG performance into the design of executive compensation. [Implications] First, companies should directly incorporate ESG performance into executive compensation design to encourage executives to actively pursue ESG management. While current compensation structures tend to reflect ESG performance indirectly through stock performance, it is crucial to include ESG performance directly in the compensation system. Second, by assigning responsibility for ESG performance alongside financial performance to executives, companies can enhance social responsibility and long-term value creation. This approach will help companies achieve sustainable management and foster long-term growth.

This research aims to analyze the influence of ESG performance on Investment - Cash Flow Sensitivity of non-financial companies listed on the Indonesia Stock Exchange for the 2017-2022 period. ESG performance was measured using ESG ratings from Sustainalytics' ESG Research and Ratings, obtained from the Bloomberg Terminal database. Testing process was carried out on 50 registered non-financial companies in Indonesia for six years with a total of 300 observations obtained through purposive sampling techniques. The results of research employed panel balance data and the OLS method found that there are still phenomena Investment – Cash Flow Sensitivity occurred and good ESG performance could reduce Investment – Cash Flow Sensitivity. Thus, it can be indicated that companies implementing good ESG performance can more easily obtain funding sources.

Contemporarily, ESG has become a hot topic, where more and more investors are aware of the importance of ESG and pay more attention to a company's performance in ESG when making investment decisions. As a result, companies are paying attention to improving their ESG performance, and many researches have shown that there is a relationship between ESG ratings of companies and the valuation of companies. This paper selects Industry Bank as a case study based on the results of MSCI's ESG rating as a measure of ESG performance. In addition, data from the company's annual report as well as investing.com and bloomberg.com is obtained to calculate various aspects of the company's indicators. In terms of the data, this paper analyzes and compares changes in Industry Bank's corporate value and performance before and after the change in ESG rating in 2019. This paper explores the relationship between ESG ratings and company valuation through specific case study, remedying the shortcomings of related studies that only stay at the theoretical level. Besides, these results explore the practical significance of ESG ratings which shed light on further study.

ESG Performance and COVID-19 Pandemic: An Empirical Analysis of European Listed Firms

ESG rating divergence is an important empirical and debatable issue that can lead to confusion from corporate users [Berg, F, JF Koelbel and R Rigobon (2022). Aggregate confusion: The divergence of ESG ratings. Review of Finance, 26(6), 1315–1344] but also possible additional information disclosure as a result of subjective interpretations of analysts [Christensen, DM, G Serafeim and A Sikochi (2022). Why is corporate virtue in the eye of the beholder? The case of ESG ratings. The Accounting Review, 97, 147–175]. Cheng et al. [2023. Understanding resource deployment efficiency for ESG and financial performance: A DEA approach. Research in International Business and Finance, 65, 101941] adopted Data Envelopment Analysis (DEA) to evaluate the proportional and pillar mix efficiency of ESG among Chinese firms. However, their study relies solely on MSCI data and overlooks the discrepancies in ratings among various ESG rating agencies. This study addresses a research gap by examining how differences in international and local ESG ratings may impact resource deployment efficiency and financial performance at the firm level. Using a sample of 1639 Chinese firms from 2018 to 2022, this study aims to provide insights into firm-level resource deployment efficiency to enhance both ESG and financial performance through comparisons of international and local ratings. Specifically, we utilize ESG performance scores from MSCI (international) and SynTao (local) and employ a Two-Stage DEA (T-DEA) framework. This approach allows us to first assess their proportional and pillar mix efficiencies and subsequently analyze their effects on financial performance. Our findings reveal a significant and distinct pattern of efficiency distributions, along with corresponding reallocation recommendations based on the international versus local ESG measures. The divergence in ESG results aligns with the cultural effect/local bias phenomenon documented in the capital market valuation literature.

Environmental, social, and governance (ESG) considerations play an increasingly important role in investment decisions. Due to data vendors’ lack of a common framework for creating ESG ratings, substantial disparities exist across vendors in their ESG ratings for the same company. ESG rating disparities make it difficult to assess whether ESG ratings are aligned with companies’ ESG performance and how ESG investing affects investment performance. This presents challenges to asset owners, policymakers, academics, and asset managers. This article highlights the nature and sources of the ESG rating disparities and advises investors to understand these aspects of noisy ESG ratings and to exercise caution when implementing ESG integration.

The existing studies on the relationship between ESG and earnings management provide mixed evidence and ignore ESG rating divergence. Using a sample of Chinese listed firms from 2009 to 2021, we examine the effect of ESG performance on earnings management under different levels of ESG rating divergence. The results reveal a negative association between ESG performance and earnings management. Meanwhile, among firms with high (low) ESG rating divergence, our results show that the degree of earnings management rises (falls) when the firms engage in ESG practices. Our findings are robust to alternative variable definitions and the Heckman two‐stage selection model. In addition, we exclude alternative explanations and consider the effect of greenwashing. Cross‐sectional analyses show that the moderating effect of ESG rating divergence is significant only among firms with greater CEO power and higher agency costs, suggesting that agency problems are the mechanism by which ESG rating divergence positively moderates the relationship between ESG performance and earnings management. This study advances the existing research on ESG and earnings quality by presenting new empirical evidence and revisits ESG rating divergence through the lens of agency theory, revealing that management could use ESG for opportunistic behavior in the presence of ESG rating divergence. Our study shows that the divergence in ESG ratings can affect the economic consequences of firms' ESG practices, offering insights for future research on ESG and ESG rating divergence and for regulators to improve the regulation of ESG disclosure and rating.

As sustainability reporting and ESG disclosure gain global importance, understanding the factors influencing ESG outcomes becomes crucial for policymakers, investors, and corporate decision-makers. China, a major player in the global economy, has recently taken steps to align its stock exchanges with international ESG reporting standards. In this context, the study examines the individual and joint effects of digital transformation and CEO compensation on ESG performance, considering moderating factors such as firm size, state ownership, and CEO age and gender. The research employs a comprehensive dataset containing 16,205 firm-year observations from 2018 to 2022, combining financial data, ESG ratings, and a matrix of word frequencies related to digital transformation extracted from annual reports. The study adopts a firm-year two-way fixed effect model, utilizing panel data and control variables to address potential endogeneity concerns and unobserved firm heterogeneity. The findings provide evidence supporting the positive impact of digital transformation and CEO compensation on ESG performance. The level of digital transformation is positively associated with ESG performance. This relationship is stronger for larger firms and firms with older CEOs, while state-owned enterprises show mixed results compared to non-SOEs. However, the effect of CEO compensation and ESG performance is stronger for male CEOs. This study thus contributes to the growing literature on ESG performance, digital transformation, and executive compensation by providing insights into their relationships in the context of Chinese listed companies.

The most widely applied indicators for sustainability are the Environmental, Social, and Governance (ESG) indicators, commonly used in academia and practice. However, these metrics lack standardization, resulting in potential discrepancies in performance assessments from different ESG rating agencies, referred to as ESG rating disagreement in the literature. Using ESG ratings from three different data providers for a sample of firms in the MSCI All Country Index for 2020, we calculated the ESG rating disagreement between Sustainalytics, Refinitv, and MSCI ESG scores. We applied quantile regression and provided evidence of a positive relationship between ESG rating disagreement and firm financial performance. Our findings contribute to a better understanding companies’ ESG performance and the relationship between ESG performance and financial performance.

There has recently been a rising acknowledgment of the significance of ESG to business sustainability. In empirical investigations, previous research has neglected to evaluate ESG rating availability, variations, and the impact they play in sustainable development. To analyse ESG rating, various institutions often employ different approaches and criteria. Some may concentrate their efforts on certain industry or locations. Domestic institutions may customise their standards to the legislative and commercial context of their own nation, while overseas institutions can consider global norms. ESG rating firms often depend on data from a range of sources, including business filings, public records, and third-party databases. The availability and quality of data may vary, altering the assessment's accuracy. This article will summarise the rating criteria and distinctions between local and overseas ESG rating agencies, as well as seek for parallels and variances between them. This enables businesses to examine the subtleties of various ESG rating organisations and make educated choices. This study's research objective is a world-renowned ESG rating agency. Secondary data and literature gathering approaches are used in this investigation. The research relied on secondary data collected over a five-year period from 2019 to 2023. According to the study findings, each ESG rating agency is unique, and this variation is due to a variety of causes. Keywords: ESG rating, Sustainability Performance, ESG Performance, Corporate Social Responsibility, ESG Factors.