We examine whether and how common ownership affects Environmental, Social, and Governance (ESG) ratings—an important research question given the increasing use of these ratings in investment decisions and corporate evaluations. We find that companies with major shareholders in common with the rating agency (“sister firms”) tend to receive higher ESG ratings. When a company becomes a sister firm through a change in the rating agency's ownership structure, its rating from that agency is subsequently upgraded, whereas its ESG ratings from other agencies remain unchanged. Sister firms exhibit greater rating disagreements across agencies than other firms. The higher ESG ratings for sister firms are partly attributable to the transfer of immaterial positive ESG information through common owners. The common ownership effect is more pronounced when the owner can exert a greater influence on the rating agency. Moreover, sister firms with initially elevated ratings demonstrate poorer future ESG performance. Overall, our findings suggest that owners can affect ESG ratings of their portfolio companies in a way consistent with their influence and interest

Using a sample of 3083 firms from 62 countries over 18 years, we analyze how the structure and identity of firms' material owners influence their Environmental, Social, and Governance (ESG) performance. We find that firms with founding families or other individual investors as owners underperform, unless family members serve as CEOs, when they outperform all others. Non-family management and government entities also perform significantly better in most analyses. These results are robust to multiple data and methodological stress tests. Our findings show that ownership matters for ESG performance and give us an indication of the preferences of different types of owners regarding ESG

We provide the most comprehensive analysis to date of the relation between ESG ratings and stock returns, using 16,000+ stocks in 48 countries and seven different ESG rating providers. We find very little evidence that ESG ratings are related to global stock returns between 2001 and 2020. This finding obtains across different regions, time periods, ESG (sub)ratings, ESG momentum, ESG downgrades and upgrades, and best-in-class strategies. We further find little empirical support for prominent hypotheses from the literature on the role of ESG uncertainty and of country-level ESG social norms, ESG disclosure standards, and ESG regulations in shaping the relation between ESG and global stock returns. Overall, our results suggest that ESG investing did not systematically affect investment performance during the past two decades

I examine how mandatory ESG disclosure regulations transmit to unregulated firms through ESG rating agencies’ peer benchmarking. Using the United Kingdom’s 2017 gender pay gap (GPG) disclosure mandate with its expected positive rating consequences for regulated U.K. firms, I show that unregulated firms with similar Refinitiv ESG ratings are significantly more likely to voluntarily disclose GPG information after the mandate. The effect is more pronounced when peers are defined by ESG rating similarity rather than market capitalization and is not driven by industry affiliation alone. Consistent with ESG ratings creating competitive pressures, spillovers are strongest when U.K. peers were initially lower ranked and when unregulated firms can report relatively better GPG performance. Further analyses show that these spillovers extend to other social disclosures and generalize to the European Union’s Non-Financial Reporting Directive. Overall, the paper highlights how ESG rating structures extend the reach of disclosure regulations beyond their formal scope. Data Availability: Data are available from the public sources cited in the text

We compile a novel data set on mandatory environmental, social, and governance (ESG) disclosure around the world to analyze the stock liquidity effects of such disclosure mandates. We document a positive effect of ESG disclosure mandates on firm‐level stock liquidity. The effects are strongest if the disclosure requirements are implemented by government institutions, not on a comply‐or‐explain basis, and coupled with strong enforcement by informal institutions. Firms with weaker information environments benefit more from ESG disclosure mandates. Our results support the view that ESG disclosure regulation improves the information environment and has beneficial capital market effects

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

Using a wide sample of international publicly traded firms, this paper studies the rapidly increasing practice of incorporating Environmental, Social, and Governance (ESG) metrics in executive compensation contracts. Our evidence suggests that this compensation practice varies at the country, industry, and firm levels in ways that are consistent with efficient incentive contracting. We also observe that reliance on ESG metrics in executive compensation arrangements is associated with engagement, voting, and trading by institutional investors, which suggests that firms could be adopting this practice to align their management's objectives with the preferences of certain shareholder groups. Finally, we find that the adoption of ESG Pay is accompanied by improvements in key ESG outcomes, but not by improvements in financial performance

We analytically compare two dominant methodologies for the construction of an ESG factor: the time-series (ratings used to sort stocks) and cross-sectional (ratings used to weight stocks) approaches. Differences in ESG rating and exposure to other firm characteristics imply an ex ante expected return spread between the two factors. We construct a cross-sectional factor (i) featuring a targeted rating, thus allowing comparability with other factors, (ii) neutralizing exposure to other firm characteristics, and (iii) not harming diversification through stock screening. Using ratings from several data vendors, we document strong variations of the factor alpha in the time series and across vendors. The conditional alpha is negatively related to the level of media attention for ESG and positively related to variations in media attention

This paper examines the impact of environmental, social, and governance (ESG) disclosure on firm investment. The analysis characterizes the optimal precision of ESG disclosure that channels investors’ tastes for ESG into firm investment. Although it is tempting to think that the optimal ESG disclosure becomes more precise when investors care more about ESG, I show this intuition is incomplete because it overlooks the fact that stronger tastes for ESG change how investors use information. Applying the analysis to a large economy, I show that mandating more precise climate disclosure than would be voluntarily provided motivates self-interested firms to act on common interests in reducing emissions. That is, a regulator can leverage market forces and a disclosure mandate to achieve a similar result as a Pigovian tax in motivating firms to internalize the externalities created by their climate-related investments

We investigate the expected consequences of negative environmental, social, and governance (ESG) news on firms' future profits. After learning about negative ESG news, analysts significantly downgrade their forecasts at short and longer horizons. Negative ESG news affects forecasts more strongly at longer horizons than other types of negative corporate news. The negative revisions of earnings forecasts following negative ESG news largely reflect expectations of lower future sales, rather than higher future costs. Quantitatively, forecast revisions can explain most of the negative impacts of ESG news on firm value. Analysts are correct to revise forecasts downward following negative ESG news