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ESG ratings of ESG index providers

Author

Listed:
  • Agrawal, Sonakshi
  • Liu, Lisa Yao
  • Rajgopal, Shivaram
  • Sridharan, Suhas A.
  • Yan, Yifan
  • Yohn, Teri Lombardi

Abstract

We explore the role of ESG raters' business models in the production of their ratings, noting that increasingly ESG raters not only produce ESG ratings but also construct and sell index products based on their ESG ratings. We examine whether deriving revenue from ESG rating-based indices is associated with inflated ESG ratings for firms with higher stock returns. Consistent with this notion, we find that raters with strong index licensing incentives issue higher ESG ratings for firms with better stock return performance and those added to their ESG indices, compared to raters with weaker licensing incentives. By comparing ESG ratings for a firm across raters with high versus low index licensing incentives, we control for the firm's fundamental ESG performance. We find that the results hold after accounting for different rating methodologies. Overall, our findings suggest that ESG ratings are associated with index construction incentives, highlighting the need for greater transparency in the incentives of producers of ESG ratings.

Suggested Citation

  • Agrawal, Sonakshi & Liu, Lisa Yao & Rajgopal, Shivaram & Sridharan, Suhas A. & Yan, Yifan & Yohn, Teri Lombardi, 2025. "ESG ratings of ESG index providers," Working Papers 363, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    • Handle: RePEc:zbw:cbscwp:324653
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    References listed on IDEAS

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    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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