ESG Rating Disagreement and 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.

Automated summary

The study found a positive relationship between ESG rating disagreement and stock returns, primarily driven by disagreement about the environmental dimension. The findings have practical implications for firms' equity cost of capital and for investment managers and asset owners using ESG investment strategies.