Dane Christensen is an Associate Professor in the School of Accounting and Charles E. Kern Research Scholar at the University of Oregon Lundquist College of Business; George Serafeim is the Charles M. Williams Professor of Business Administration and the Faculty Chair of the Impact-Weighted Accounts Project at Harvard Business School; and Anywhere Sikochi is an Assistant Professor of Business Administration at Harvard Business School. This post is based on their recent paper, forthcoming in the Accounting Review. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).
Despite the rising use of environmental, social, and governance (ESG) ratings, there is substantial disagreement across rating agencies regarding what rating to give to individual firms. This is highly problematic because in the absence of agreement on what good ESG performance constitutes, market participants might be misled by ESG ratings. We also have very little evidence on why providers disagree so much. Without understanding the reasons for this disagreement, it is difficult to understand not only what the potential remedies could be, but also the plausible consequences of this disagreement.
To address this, we focus on a key firm attribute that we hypothesize is likely to be of first-order importance in causing providers to disagree on ESG ratings. Specifically, we focus on the extent of a firm’s ESG disclosure, as theory suggests that disagreement arises due to people having different information sets and/or different interpretations of information. Conventional wisdom and a plethora of evidence in other settings suggest that higher disclosure helps lower disagreement by reducing differences in the information that people have. We argue that in our setting, due to the subjective nature of ESG information, the opposite would be true, where higher disclosure would increase disagreement, as disclosure expands opportunities for different interpretations of information.