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When Performance Meets Perception: The Divergence Between ESG Ratings and ESG Performance

Author(s)

Xiankang Wang*

Affiliation(s)

Faculty of Social Sciences, National University of Singapore, Singapore *Corresponding Author

Abstract

Environmental, Social, and Governance (ESG) ratings have become critical instruments for investors and stakeholders in assessing corporate sustainability performance. However, substantial divergence exists among ratings provided by different agencies for the same company, raising fundamental questions about the relationship between perceived ESG performance (as captured by ratings) and actual ESG outcomes. This study examines the divergence between ESG ratings and ESG performance using secondary data from six major rating agencies (MSCI, Sustainalytics, Refinitiv, S&P Global, Bloomberg, and FTSE Russell) covering 1,248 publicly traded companies across 15 industries from 2019 to 2024. Employing comprehensive methodological frameworks including correlation analysis, regression decomposition, and panel data models, we document three key findings. First, the average pairwise correlation among ESG ratings is 0.54, indicating moderate to substantial divergence that persists over time. Second, variance decomposition reveals that this divergence stems primarily from measurement differences (58%), followed by scope variations (34%), and weighting methodologies (8%). Third, higher rating divergence is associated with increased information asymmetry (7.8% higher bid-ask spreads), reduced stock price informativeness (4.3% higher market model R-squared), and lower institutional ownership (5.3% reduction). These findings have important implications for investors, Strategists, and rating agencies in understanding and addressing ESG rating heterogeneity in capital markets.

Keywords

ESG Ratings; Rating Divergence; Measurement Error; Scope Heterogeneity; Information Asymmetry; Institutional Ownership

References

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