ESG Rating Disagreement and ESG Disclosure: A Literature Review

Michael D. Kimbrough; Xu (Frank) Wang; Sijing Wei; Jiarui (Iris) Zhang

doi:10.1142/S1094406026410027

SynopsisThe research problemWe examine the insights from prior studies on the question of whether management-provided environmental, social, and governance (ESG) disclosure can reduce ESG-related rating disagreement (hereafter, ESG disagreement). Specifically, we summarize evidence from prior studies on: (a) what ESG disagreement is, (b) the importance of ESG disagreement, (c) the causes of ESG disagreement, (d) potential solutions for mitigating ESG disagreement, and (e) the specific role of ESG disclosure as a potential solution. We outline directions and provide insights for future research in this area.MotivationESG rating agencies often disagree with each other about individual firms' ESG performance, as reflected in substantial differences in ESG ratings. Such disagreement is associated with adverse capital market and firm outcomes, sparking interest from researchers, policymakers, and firms in strategies to mitigate it. ESG disagreement is attributable to different understandings of what constitutes good ESG performance as well as differences in data sources, methodologies, and rating agency incentives. In addition, the lack of completeness, standardization, and consistency in ESG data allows for varying interpretations, further contributing to ESG disagreement. Transparency about ESG performance can resolve ESG disagreements by addressing many of its underlying causes. Managers are well-placed to provide this transparency because they possess the most direct knowledge of their firms' ESG activities. Therefore, in this study, we review prior literature on the effect of management-provided ESG disclosure in resolving ESG disagreement.Adopted methodologyWe provide a structured literature review. Specifically, we review prior literature regarding ESG disagreement and ESG disclosure and highlight potential future research directions in this context.AnalysesWe analyzed 21 working papers and 30 papers published in peer-reviewed high-quality journals that are related to ESG disagreement in the English language over a 23-year period (2002-2024).FindingsManagement-provided ESG disclosure can reduce ESG-related disagreement. However, whether it achieves this outcome depends on various factors, including the characteristics of the disclosure itself and the broader institutional environment. Ongoing developments offer many avenues for researchers to explore to better understand the impact of ESG disclosure on ESG disagreement. We highlight some potential future research directions in this context.