Financial Analysts Journal 23 September 2021 Volume 77 Issue 4
ESG Rating Disagreement and Stock Returns
This study examines the extent of the disagreement by different rating agencies over ESG (environmental, social, and governance) ratings. Companies with high disagreement in their ratings face higher risk premiums but better stock returns.
Overview
Using environmental, social, and governance (ESG) ratings from seven different data providers for a sample of firms in the S&P 500 Index between 2010 and 2017, we studied the relationship between ESG rating disagreement and stock returns. We found that stock returns are positively related to ESG rating disagreement, suggesting a risk premium for firms with higher ESG rating disagreement. The relationship is primarily driven by disagreement about the environmental dimension. We discuss the practical implications of our findings for firms’ equity cost of capital as well as for investment managers and asset owners who use ESG investment strategies.
About the Authors
Rajna Gibson Brandon is a professor of finance at the Geneva School of Economics Management and Geneva Finance Research Institute, University of Geneva, Switzerland, and a research fellow at the European Corporate Governance Institute, Geneva, Switzerland.
Philipp Krueger is an associate professor of responsible finance at the Geneva School of Economics Management and Geneva Finance Research Institute, University of Geneva, Switzerland, and senior chair at the Swiss Finance Institute, Geneva, Switzerland.
Peter Steffen Schmidt is a senior research associate at the Department of Business Administration, University of Zurich, Switzerland.