ESG Ratings Research Articles

Constructing ESG Equity Index Portfolios: The Impact of ESG Ratings on Risk and Return

Constructing ESG Equity Index Portfolios: The Impact of ESG Ratings on Risk and Return

Short-term market reactions to ESG ratings disclosures: An event study in the Chinese stock market

This paper evaluates how Chinese stocks respond to the onboarding of China-focused ESG scores on the Bloomberg Professional Terminal in the short term. By utilizing the event study approach, we find that the top 10 % of ESG-rated stocks react significantly positively to the onboarding event, whereas the bottom 10 % of ESG-rated stocks experience significant and negative cumulative average abnormal returns. Moreover, this effect is asymmetric in that the negative returns have a greater and more prominent magnitude than the positive returns. By comparing the cross-sectional data results before and after the rating event, we propose several channels through which these effects may function. The findings of this study also have economic and policy implications for investors and policy-makers.

Dual-Credit Policy of New Energy Automobiles in China: Corporate Innovation Capability

This study investigates the impact of China’s Dual-Credit Policy on innovation capability in the new energy vehicle (NEV) industry using a difference-in-differences approach with dynamic panel data from 2013 to 2022. We employ multiple innovation measures, including patent counts, valid invention patents, and patent grant rates. Our findings reveal that the policy has a positive and significant effect on NEV innovation, partially mediated by R&D investment. Using GMM estimation to address endogeneity, we find the policy effect varies across subgroups based on location, ESG rating, and ownership type. Dynamic effect analysis shows the policy’s impact intensifies over time. Threshold effect analysis identifies a critical policy intensity level beyond which innovation effects are amplified. Our results have implications for policymakers in designing effective innovation incentives and for firms in strategically responding to regulatory changes in the NEV sector.

Divergence of ESG Ratings: International and Russian Experience

ESG rating is an important indicator of a company’s social responsibility, which is taken into account by investors and regulators. However, if the ESG rating is calculated incorrectly, investors and regulators will make erroneous decisions and companies will be given improper guidance about how to modify their operations. Currently, there is a serious methodological problem in that ESG ratings from various rating agencies can be significantly different for the same company. Two of the most urgent questions in current ESG research are why these differences come about and how critical the divergence of ratings is. First, the article reviews international research on rating divergence and summarizes the findings. A similar analysis is then performed to compare the methodologies and rating results of three leading Russian ESG rating providers — RSPP, RAEX, and NRC — for 2020-2021. The results indicate that Russian rating agencies are somewhat more divergent in their assessments of companies than international ones (Krippendorff’s alpha for Russian ratings is 0.4, but for non-Russian ratings it is 0.55), and Russian agencies’ coverage of ESG components is less comprehensive than that of the other rating agencies (although coverage in the RAEX methodology is close to the average of the international equivalents). The article also analyzes the distribution of companies across different gradations of the ratings by the three Russian agencies and attributes the distinctions that emerge to the way the ratings are calculated and the general ideology of the agency. Comparison of average ratings for different industries by different agencies indicates that these ratings are also rather inconsistent.

ESG ratings and corporate success: analyzing the environmental governance impact on Chinese companies’ performance

This study explores the impact of ESG ratings on corporate performance, focusing on achieving sustainable development and corporate sustainability through innovation within the context of high-quality global economic growth. In recent years, ESG ratings have garnered significant attention in the financial sector, influencing corporate strategy and performance management. While some argue that ESG activities might detract from profitability, others highlight that firms with strong ESG performance can access low-cost capital, thereby enhancing overall performance. Using a sample of China’s A-share listed companies from 2009 to 2021, this research examines the influence and mechanisms of ESG ratings on corporate performance. The findings indicate a significant positive relationship between ESG ratings and corporate performance, which remains robust after rigorous testing. Mediation analysis reveals that ESG ratings improve corporate performance by alleviating financing constraints and enhancing corporate reputation. Furthermore, the performance-enhancing effects of ESG ratings are more pronounced in firms with robust internal controls and private enterprises. This research provides empirical evidence to support stronger ESG investment and the refinement of the ESG rating system.

ESG Performance and Systemic Risk Nexus: Role of Firm-Specific Factors in Indian Companies

This study investigates the ESG performance–systemic risk (SR) nexus among Indian companies. Using the beta coefficient from the Capital Asset Pricing Model (CAPM) and statistical analysis, it explores how ESG performance affects SR. The findings reveal that firms with higher ESG scores have lower SR sensitivity. Notably, there is a significant difference in risk sensitivity between high- and low-ESG-rated companies, with ESG effects being less pronounced in high-cap firms compared to low-cap firms. Conversely, large firms, older firms, and those with lower borrowing costs show a diminished effect of ESG ratings on their SR sensitivity. These results underscore the importance of firm-specific characteristics in determining the efficacy of ESG strategies in risk mitigation. This study reveals that ESG performance reduces SR, with market valuation affecting this relationship.

Greenwashing, carbon emission, and ESG

AbstractRecent decades have seen an increasingly awareness of climate changes, putting a pressure on companies to do more to deal with carbon emission. One of the popular measures used in assessing how well a company commits to sustainable development and reduces carbon emissions is ESG ratings. Given the importance of both ESG ratings and carbon footprints on our society and the target of net zero by 2050, we explore the relation between carbon emission and the Refinitiv ESG scores for the US sample from 2005 to 2018. Our findings indicate that high ESG‐rated or environment‐rated firms do not have lower carbon emissions. It appears that these firms are not incentivized to do more for environment, as they have already been awarded with good publicity for being environmentally friendly. Finally, our findings also support the ‘cheap talk’ concept, greenwashing hypothesis and legitimacy theory. Companies are not genuinely committed to climate action.

ESG and firm value: A hybrid literature review on cost of capital implications from Scopus database

AbstractThe relationship between ESG and firm value has been a relevant subject of study in recent years. We conducted a hybrid literature review to understand the literature's findings on this relationship and its implications in terms of cost of capital. First, a keyword co‐occurrence analysis on a 122 ABS ranked journals articles selection from Scopus database was adopted to identify and investigate the main research fields of the current literature. Then a content analysis through the bibliographic coupling of the most globally cited contributions was made, defining a final sample of 50 articles obtained through a minimum threshold of at least 15 total global citations (TGCs). We found that studies on the cost of debt configuration are more aimed at determining the implications on firm value, while most contributions on the cost of equity focus on the assessment of the risk–return profile for the investor or the construction of an ESG portfolio. Furthermore, we found that most of the literature has a consensus view on the lack of transparency behind the ESG ratings and their construction methodology, stating that disagreement on ESG ratings not only limits the results of empirical analysis, but can also negatively affect firm value due to a higher level of uncertainty.

Under the ESG Dome of China

Implementing ESG is crucial for China’s modernization journey and corporate sustainability. To deeply understand the current standing of ESG in China, this study leverages online data richness using text mining techniques, specifically Latent Dirichlet Allocation (LDA) and ego network analysis. LDA is utilized to identify prevalent discussion topics on ESG, while ego network analysis is applied to examine the relationships and influences among key stakeholders. The scientific aim of this research is to identify prevalent ESG discussion topics, examine the relationships and influences among stakeholders, and determine core ESG focus areas on Chinese society. The findings highlight popular discussion topics such as ESG investment, the ESG notion, green finance transformation, and ESG rating. These topics underscore China’s growing concern for environmental protection and social responsibility. The core discussion areas focus on sustainable development, company social responsibility, and eco-friendliness, framing harmonized progress across economic, social, and environmental realms. Interestingly, governance discourse is sparse; the reasons are analyzed. Through the analysis of online discussions on China’s ESG, this study aims to enhance policymakers’ and participants’ understanding of the true status of China’s ESG, being of practical significance for policy formulation and appropriate ESG strategies.

Fuzzy–Rough Analysis of ESG Ratings and Financial and Growth Ratios on the Stock Returns of Blue-Chip Stocks in Taiwan

This study uses fuzzy–rough analysis to investigate the influence of Environmental, Social, and Governance (ESG) ratings, along with critical financial and growth ratios, on the stock returns of blue-chip companies in Taiwan. The growing importance of ESG factors in investment decisions underscores the need to understand their impact on stock performance. By integrating the fuzzy–rough set theory, which accommodates uncertainty and imprecision in data, we analyze the complex relationships between ESG ratings, traditional financial metrics (such as ROE, return on equity), and stock returns. Our findings provide insights into how ESG considerations, alongside financial indicators, drive the returns of Taiwan’s blue-chip stocks. Three public-listed companies were evaluated using this approach, and the results are consistent with the actual stock performance. This research contributes to the field by offering a robust methodological approach to assess the nuanced effects of ESG factors on financial performance, thus aiding investors and management teams in making informed decisions.

ESG and Chinese corporate OFDI

In this era of sustainable development, ESG information disclosure and its capacity to fulfill goals have a significant influence on the outward foreign direct investment (OFDI) of Chinese firms. Using data from A-share listed businesses in Shanghai and Shenzhen from 2010 to 2020, this study empirically studies both the impact and mechanism of ESG information disclosure on corporate OFDI. According to the study, the greater a corporate's ESG rating, the more likely it is to engage in OFDI activities. Mechanism analysis shows ESG primarily supports corporate OFDI by easing financial limitations, lowering business risks, optimizing location choices, and strengthening reputation mechanisms. The heterogeneity study indicates this impact is stronger in large-scale firms, state-owned enterprises, and enterprises not subject to key supervision. Lastly, a further study indicates not only that ESG ambiguity reduces the promotion effect of ESG on corporate OFDI, but that high-quality disclosure also promotes OFDI more than purely symbolic low-quality ESG disclosure.

Ensuring Transparency of ESG Transformation of Corporations (Using the Example of Retail Companies)

In recent years, companies in the retail sector have begun to introduce and incorporate the principles of sustainable development into their strategies and began to publish reports on sustainable development. ESG transformation of companies in the retail industry has its own characteristics. The purpose of the work is to determine the directions of ESG transformation in retail companies, as well as tools for ensuring transparency of activities in the field of sustainable development. The methodological basis of the study was the concept of sustainable development and ESG, methods of statistical analysis, a systematic approach, scientific works of leading domestic and foreign scientists in the field of sustainable development, ESG transformation of retail companies. In the course of the work the author has identified 6 areas of ESG transformation that are most relevant and consistent with the Sustainable Development Goals and the industry specifics of the retail sector. It was revealed that there is a problem of comparability of ESG ratings and rankings from various agencies, insufficient prevalence of the practice of publishing non-financial reporting by organisations from this segment.The set of non-financial indicators proposed by the author for retail companies are grouped by areas of ESG transformation, as well as by Sustainable Development Goals. The publication of the proposed indicators in the annual report or sustainability report is intended to help management and interested stakeholders evaluate the results of ESG transformation of retail companies in more depth and detail.

Reconsidering the impact of environmental, social and governance practices on firm profitability

PurposeThis paper investigates the relationship between commitment to ESG practices and firm performance using a synthetic index based on ESG disclosure and ESG performance scores.Design/methodology/approachUsing the Mazziotta-Pareto aggregation method, we develop a novel synthetic index of ESG engagement based on ESG rating and disclosure. This index is employed in a dynamic panel regression, implemented using the Arellano-Bond estimator, to explain profitability in a sample of 146 listed Canadian firms over the period spanning from 2014 to 2021.FindingsESG practices may either foster or hinder firm performance. In particular, a synergy emerges between the social and environmental dimensions of ESG practices, shedding light on the relevance of high standards in terms of environmental and social activities.Practical implicationsThe study emphasizes the significance of acknowledging the various facets of ESG engagement and the necessity of transcending the current constraints of accessible ESG data and ratings. Synthetic indices combining different types of ESG information may contribute to mitigating the problems created by strategic disclosure on the part of firms, which typically results in undesirable practices such as greenwashing and social washing.Originality/valueThis is the first study that applies the Mazziotta-Pareto method to develop a synthetic index of ESG engagement, tackling each pillar separately. Moreover, when investigating the effect of ESG engagement on profitability, we allow for cross-pillar synergies and/or trade-offs.

Does a Change in the ESG Ratings Influence Firms’ Market Value? Evidence from an Event Study

In recent years, the field of “ESG finance” has seen rapid growth, resulting in the emergence and expansion of ESG ratings and rating agencies. This study investigates how financial investors react to updates in ESG ratings provided by two prominent ESG rating agencies, namely MSCI and Refinitiv. The main objective is to determine whether any positive or negative changes in a company’s sustainability ratings directly impact its market value. The Event Study methodology was used for this investigation, which analyses the Cumulated Average Abnormal Returns (CAARs) of economic events to assess their influence on corporate valuations. We analysed over 840 rating updates (events) using a sample of 75 companies across various industries, all listed on major stock exchanges. Our findings indicate that shifts in sustainability ratings, as evaluated by the two rating agencies, do not significantly impact companies’ market capitalisation. Furthermore, these outcomes remain consistent over time, suggesting that financial markets are not assigning increasing significance to ESG ratings. We offer potential explanations for these findings, which are discussed in light of the existing literature on the subject.

Improve carbon emission efficiency: What role does the ESG initiatives play?

Driven by the "dual carbon" goal, it is essential to investigate whether companies can enhance carbon emission efficiency by improving Environmental, Social, and Governance (ESG) performance. This study investigates the relationship between ESG ratings and carbon emission efficiency among Chinese A-share listed companies. The study reveals that a higher ESG rating significantly improves carbon efficiency. Mechanism studies indicate that the effect of ESG mainly comes from easing financing constraints, promoting green innovation, and strengthening supervision. Additionally, the study finds that the impact of ESG on carbon emission efficiency is more pronounced in non-heavy polluting and non-state-owned enterprises. Economic policy uncertainty diminishes the positive effects of ESG initiatives on carbon efficiency, while enhanced governmental concerns to environmental significantly bolsters these impacts. This paper offers empirical insights that can inform adjustment of policies concerning ESG performance and carbon emission.

Environmental regulations, supply chain relationships, and green technological innovation

This paper examines the spillover effect of environmental regulatory pressure on firms' green technological innovation, from the perspective of supply chain relationships. Analyzing data from Chinese listed companies, we find that the average environmental regulatory pressure faced by the customer firms of a supplier firm enhances the green patent applications filed by the supplier firm. When the industry of the supplier is more competitive or the proportion of the supplier's sales from its largest customer is higher, the supplier feels more pressured to pursue green innovation, resulting in more green patent filings. Thus, via their negotiation power, customer firms can prompt the supplier firm to innovate to meet their demand for green technologies. Finally, we show that this effect is particularly pronounced when the supplier firm has a strong financial position, is located in a highly marketized region, receives low R&D government subsidies, or enjoys a high ESG rating.

Comparing ESG score weighting approaches and stock performance differentiation

This study examines how weighting methodologies in ESG ratings for sustainability categories align with their financial relevance. We analyse Refinitiv’s data-driven weights against equal weights and SASB’s expert-based weights. Our findings show all methods differentiate firms by returns, but equal and SASB weights lead to a stronger effect, particularly after the Paris Agreement. This suggests alternative weighting approaches might better capture the financial significance of ESG categories.

ESG Rates Divergence on the Emerging Markets in the European Union

Abstract The growing emphasis on sustainability has led to a rise of ESG rating providers, but this expansion has brought challenges. ESG ratings are complex and can vary significantly between agencies, due to different scoring methods and non-standardized disclosures, making accurate assessments difficult. Moreover, investors and companies express limited confidence in the accuracy of these ratings. Regulatory developments aim to improve ESG disclosure and comparability, however, discrepancies in assessment criteria and rating methodologies persist. These aspects have led to the increasing concern of researchers from the academic field and professionals from the financial markets to identify how divergent are the ESG rates provided by various suppliers, what are the causes of this divergence, how do these influence the performance of companies and above all, how the negative effects of divergent ESG rates mitigated. Most researchers focused their attention on the aforementioned aspects on the developed financial markets from the USA or Europe, on the top companies or on the companies listed on the BRIC emerging markets. This article analyzes the divergence of ESG rates provided by three well-known rate-providers, for companies listed on emerging markets in Europe, contributing to increasing knowledge in this field.

CSR Language and the Divergence of ESG Ratings

CSR Language and the Divergence of ESG Ratings

The Impact of ESG Factors on the Firm Performance

This paper examines the impact of environmental, social, and governance (ESG) factors on corporate behavior and performance. Amid increasing concerns from stakeholders, companies are pressured to prioritize ESG aspects. This study leverages stakeholder theory, which emphasizes balancing all stakeholder interests over solely maximizing shareholder wealth. A significant shift was noted in 2019 when U.S. business leaders endorsed a "Statement of Purpose" emphasizing societal benefits over shareholder interests, reflecting a broader move towards corporate social responsibility. The paper analyzes ESG's influence on three key areas: investor expectations, risk management, and long-term strategy. It highlights the mixed research findings on the correlation between ESG ratings and stock prices, noting emerging studies that explore behavioral biases in investor decisions. In terms of risk management, ESG practices are increasingly integral, with research showing that higher ESG ratings can reduce default risks. Regulatory risks are also discussed, particularly concerning climate change policies. Furthermore, the paper explores how sustainability, driven by investor and consumer activism, is becoming central to corporate long-term strategies. Models like the ISM and concepts like double materiality are used to demonstrate how ESG factors can optimize corporate performance. Ultimately, the study concludes that ESG elements significantly impact corporate behavior, suggesting a positive correlation with firm performance.