We study the association between environmental, social, and governance (ESG) government risk management and firm-level IPO underpricing between 2008 and 2018. Examining 7446 IPOs issued in 36 countries, we find that IPO underpricing tends to be lower in countries with higher ESG Government Ratings. When we uniquely examine the environmental, social, and governance pillars, we find that underpricing tends to be lower in countries with stronger risk management practices in each of these areas. Additional analysis indicates that the negative impact of ESG ratings on IPO underpricing is more pronounced in countries with more transparent financial disclosures, higher liability standards, and stronger shareholder protections

This study examines the determinants and consequences of broker in-house ESG research. Using manually collected brokerage ESG research data, we find that the provision of in-house ESG research is positively related to both demand-side factors (client demand, internal demand, and local ESG awareness) and supply-side factors (broker size and coverage of sustainable industries). Regarding the consequences of such research, we find that in-house ESG research is associated with improved earnings forecast accuracy in industries where ESG is more salient. Further, the market reaction to earnings forecast revisions is stronger when equity analysts have access to in-house ESG research. Finally, we observe a consistent pattern suggesting that ESG analysts support equity analysts beyond forecast accuracy, as equity analysts with access to in-house ESG research issue more accurate target prices, more informative recommendation upgrades for ESG-heavy industries, and discuss ESG issues more extensively in their analyst reports. Data Availability Statement: The data used in this study are obtained from publicly available sources identified in the paper, as well as job posting data licensed from Lightcast. Sample construction procedures are described in the paper. Researchers interested in the job posting data should contact Lightcast directly, as access is subject to licensing restrictions

We compare the ESG ratings of MSCI, a global rater, with those of SINO, a local Chinese rater, to evaluate their effectiveness in capturing ESG risks within the Chinese context. Using ESG issues revealed in negative incidents as a proxy for ESG risk, we find that the ratings from the two raters often diverge, with SINO generally outperforming MSCI in predicting ESG risks in China. This divergence is more pronounced for firms with extensive ESG disclosures and when there are significant differences in how the raters define and measure ESG issues. Distance-based information asymmetry does not appear to play a significant role in explaining the performance gap. The advantage of local raters likely stems from their flexibility in tailoring methodologies to reflect country-specific nuances. In contrast, global raters adopt consistent methodologies to meet investor demand for comparability, but this approach may inadvertently reduce their relevance for capturing localized ESG risks. Data Availability: Data are available from sources identified in the text

We provide the first evidence that conflicts of interest arising from commercial ties lead to bias in environmental, social, and governance (ESG) ratings. Using the acquisitions of Vigeo Eiris and RobecoSAM by Moody's and S&P as shocks to the commercial ties between ESG rating agencies and their rated firms, we show that, after their acquisitions by the credit rating agencies (CRAs), ESG rating agencies issue higher ratings to existing paying clients of the CRAs. This effect is greater for firms that have more intensive business relationships with the CRAs, but weaker for firms with more transparent ESG disclosures or higher long‐term institutional ownership. The upwardly biased ESG ratings help client firms issue more green bonds and enable the CRAs to maintain credit rating business. Finally, the upwardly biased ESG ratings are less informative of future ESG news. Overall, the business incentives of rating providers appear to engender ESG rating bias

This paper sheds light on the impact that environmental, social and governance (ESG) corporate practice disclosure has on equity financing. We present a unique framed field experiment in which professional private equity investors competed in closed auctions to acquire fictive firms. We hence observe that corporate non-financial (ESG) performance disclosure impacts firm valuation and investment decision and we quantify to which extent. Main result is an asymmetric effect, investors reacting more to bad ESG practice disclosure than to good ESG ones. Our findings are discussed in terms of practical implications for both investors and firm managers

In recent years, firms have increasingly come under scrutiny from environmental, social, and governance (ESG) rating agencies which systematically assess and publicize ESG-related information to diverse stakeholders. This study aims to investigate whether firms exhibit a heightened incentive to avoid ESG-related regulatory violations once they come under the coverage of ESG rating agencies. Analyzing data spanning from 2000 to 2018 and considering the coverage provided by four prominent ESG rating agencies to U.S. firms, we leverage the staggered initiation and intensity of this coverage. Our findings reveal a negative correlation between ESG violations and the commencement and extent of coverage by ESG rating agencies. This relationship is particularly pronounced for firms characterized by lower levels of corporate monitoring as indicated by fewer analysts providing coverage, limited media attention, weaker ESG commitments, and less disparate ESG ratings. Taken together, our study sheds light on the monitoring role of ESG rating agencies, illustrating their significance in incentivizing managers to mitigate ESG violations

This study investigates the imbalance of ESG investing across its environmental (E), social (S), and governance (G) pillars. We find that E plays a more significant role in influencing the imbalance level, and mutual funds prioritize mitigating E risks over S and G risks, which is more pronounced in funds with higher sustainability ratings. Moreover, our findings indicate that investors respond to ESG imbalance, with the level of imbalance showing a negative impact on fund flows, especially for funds with higher sustainability ratings. However, this negative relationship is mitigated as climate change concerns increase. Furthermore, we find that political ideology plays a role in the ESG imbalance, with the imbalance of funds in blue states being more driven by lower environmental considerations compared to those in red states. Additionally, we observe that the ESG imbalance is positively associated with various fund risks. Our study offers implications for policymakers and stakeholders in the asset management industry regarding ESG investing practices

This paper analyzes the asset pricing and portfolio implications of an important barrier to sustainable investing: uncertainty about the corporate ESG profile. In equilibrium, the market premium increases and demand for stocks declines under ESG uncertainty. In addition, the CAPM alpha and effective beta both rise with ESG uncertainty and the negative ESG-alpha relation weakens. Employing the standard deviation of ESG ratings from six major providers as a proxy for ESG uncertainty, we provide supporting evidence for the model predictions. Our findings help reconcile the mixed evidence on the cross-sectional ESG-alpha relation and suggest that ESG uncertainty affects the risk-return trade-off, social impact, and economic welfare

This study examines the effects of environmental, social, and governance (ESG) performance on bond return volatility. After controlling for bond characteristics and firm fundamentals, we find a robust positive relationship between ESG performance and bond return volatility. The empirical results demonstrate that the impact on bond return volatility is primarily driven by ESG strengths rather than concerns. The results are robust to alternative measures, sample periods, and endogeneity controls. Furthermore, the effect of ESG performance is more pronounced for firms with opportunistic managers and poor information environments

Financial analysts closely follow a firm’s operations and assess the risks that it faces. In this paper, we examine whether analysts incorporate ESG risks into their stock recommendations and target prices. Specifically, we use a unique firm-day level dataset on negative ESG risk incidents to proxy for unobservable risk assessments of analysts. We find that analyst outputs predict future ESG incidents, suggesting that analysts incorporate ESG risks into their models. Our results are robust to controlling for ESG incidents that firms experienced in the past, and are stronger in more transparent information environments, and in the presence of more guidance on ESG issues from the Sustainability Accounting Standards Board. Importantly, we find that analysts incorporate ESG risks through adjusting discount rates rather than cash flow estimates. Overall, our results highlight the ability of financial analysts to synthesize and integrate ESG risks into their research