Bridge over ocean
23 September 2021 Financial Analysts Journal Volume 77, Issue 4

ESG Rating Disagreement and Stock Returns

  1. Rajna Gibson Brandon
  2. Philipp Krueger
  3. Peter Steffen Schmidt

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.

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.
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