Li, Lou, and Zhang (2024)

Li, Xuanbo, Yun Lou, Liandong Zhang.  “Do Commercial Ties Influence ESG Ratings? Evidence from Moody’s and S&P.” Working paper (Singapore Management University), 2024.

From the authors’ abstract: “We provide the first evidence that conflicts of interest arising from commercial ties lead to bias in environmental, social, and governance (ESG) ratings… [W]e show that ESG rating agencies issue higher ratings to existing paying clients of the credit rating agencies (CRAs) after their acquisitions by the CRAs. This effect is greater for firms that have more intensive business relationships with the CRAs, but weaker for firms with more transparent ESG disclosures or higher long-term institutional ownership. The upwardly biased ESG ratings help client firms issue more green bonds and enable the CRAs to maintain credit rating business. Finally, the upwardly biased ESG ratings are less informative of future ESG news. Overall, the business incentives of rating providers appear to engender ESG rating bias.”

LK comment: Moskowitz Prize Honorable Mention, 2024.

Moskowitz Prize article: https://www.kellogg.northwestern.edu/news/blog/2024/12/18/moskowitz-prize-2024/

Moskowitz Prize research brief: https://www.kellogg.northwestern.edu/-/media/files/academics-research/social-impact-sustainability/moskowitz-prize/2024-moskowitz-research_brief_do-commercial-ties-revised-1.ashx

Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4190204