ESG Disagreement: Determining Factors and Impact on Stock Performance

Abstract

Using a sample of S&P 500 firms in the period 2010-2020. We will first study the rating variation of Environmental, Social, and Governance (ESG) ratings among some of the top prominent agencies. Secondly, we will study the characteristics of variation. Thirdly, we will examine the impact of the ESG rating variation on stock performance. We find that there is a large deviation between providers both crosssectionally and over time. We discover that transparency can have an ambiguous effect on disagreement. While firm-size bias generally increases disagreement. Investors respond to the disagreement in overall and social score by undervaluing the stock, and by overvaluation in environmental disagreement. We conclude that ESG ratings continue to be a highly heterogeneous space, with clear challenges in objectivity, as well as increasing influence on the stock price.