Does Voluntary ESG Reporting Resolve Disagreement among ESG Rating Agencies?

Abstract

US companies are increasingly responding to demand from investors and other stakeholders for transparent information about companies’ environmental, social, and governance (ESG) performance by issuing ESG reports on a voluntary basis. We examine whether these reports help to resolve the previously documented disagreement among ESG rating agencies about individual companies’ ESG performance. Consistent with this possibility, we find that disagreement among ESG rating agencies is lower for firms that voluntarily issue ESG reports. In particular, disclosures about the environmental and social dimensions help reduce disagreement about the company’s performance on those dimensions. Using textual analysis, we find that longer reports are associated with reduced disagreement among ESG raters while reports with more positive tones or that use a greater number of sticky words are associated with heightened disagreement. The association between ESG disclosure and ESG disagreement is more pronounced when firms obtain third-party attestations on their ESG reports, especially from accounting firms, and when firms adhere to advanced levels of Global Reporting Initiative (GRI) reporting standards. Finally, ESG disagreement is positively associated with disagreement and uncertainty in the capital market, providing strong motivation for firms to voluntarily disclose ESG reports to reduce ESG disagreement.