"Do commercial ties influence ESG ratings? Evidence from Moody's and S&" by Xuanbo LI, Yun LOU et al.
 

Publication Type

Journal Article

Version

publishedVersion

Publication Date

12-2024

Abstract

We provide the first evidence that conflicts of interest arising from commercial ties lead to bias in environmental, social, and governance (ESG) ratings. Using the acquisitions of Vigeo Eiris and RobecoSAM by Moody's and S&P as shocks to the commercial ties between ESG rating agencies and their rated firms, we show that, after their acquisitions by the credit rating agencies (CRAs), ESG rating agencies issue higher ratings to existing paying clients of 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.

Keywords

ESG; conflicts of interest; rating agencies; sustainability; commercial ties; disclosure

Discipline

Accounting | Business Law, Public Responsibility, and Ethics | Corporate Finance

Research Areas

Corporate Governance, Auditing and Risk Management

Publication

Journal of Accounting Research

Volume

62

Issue

5

First Page

1901

Last Page

1940

ISSN

0021-8456

Identifier

10.1111/1475-679X.12582

Publisher

Wiley

Copyright Owner and License

Authors-NC-ND

Additional URL

https://doi.org/10.1111/1475-679X.12582

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