Do Commercial Ties Influence ESG Ratings? Evidence from Moody's and S&P

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

2 Scopus Citations
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Original languageEnglish
Pages (from-to)1901-1940
Journal / PublicationJournal of Accounting Research
Volume62
Issue number5
Online published6 Nov 2024
Publication statusPublished - Dec 2024

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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. © 2024 The Author(s). Journal of Accounting Research published by Wiley Periodicals LLC on behalf of The Chookaszian Accounting Research Center at the University of Chicago Booth School of Business.

Research Area(s)

  • commercial ties, conflicts of interest, disclosure, ESG, rating agencies, sustainability

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Full text of this publication does not contain sufficient affiliation information. With consent from the author(s) concerned, the Research Unit(s) information for this record is based on the existing academic department affiliation of the author(s).

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