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Who should pay for ESG ratings?

Author

Listed:
  • Lovo, Stefano

    (HEC Paris)

  • Olivier, Jacques

    (HEC Paris)

Abstract

We model how a profit-maximizing agency decides whether to sell ESG ratings to issuers or investors. For firms in sufficiently green sectors or when the proportion of socially responsible investors is large enough, ESG ratings increase expected stock prices and the “issuer pays” business model is more profitable than “investors pay”. When all investors are socially responsible, the model coincides with a model of credit ratings, explaining why credit ratings are sold to issuers while most ESG ratings are sold to investors. Ratings boost equilibrium investment in ESG but their impact on welfare is ambiguous, even for socially responsible investors.

Suggested Citation

  • Lovo, Stefano & Olivier, Jacques, 2025. "Who should pay for ESG ratings?," HEC Research Papers Series 1547, HEC Paris.
    • Handle: RePEc:ebg:heccah:1547
    DOI: 10.2139/ssrn.5106010
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    More about this item

    Keywords

    ESG; Rating agencies; Investors pay; Issuer pays; emission abatement; incentives; responsible investors;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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