ESG Analysis: Understanding ESG Rating Divergence and Its Market Implications

Tong Wang

Co-Presenters: Individual Presentation

College: College of Business and Public Management

Major: BS.FINANCE

Faculty Research Mentor: Yu, Huaibing  

Abstract:

ESG ratings are widely used to evaluate corporate sustainability performance, yet significant divergence exists among ratings provided by different agencies. This paper examines the main causes and implications of ESG rating divergence. We find that differences in evaluation frameworks, data sources, and levels of corporate information disclosure are key drivers of inconsistent ratings. Such divergence increases information-processing costs for investors, raises financing uncertainty for firms, and complicates analysis for financial intermediaries. To respond to these challenges, we suggest that investors and researchers adopt multiple rating sources, align evaluation choices with their objectives, and interpret ESG scores with greater caution. Understanding ESG rating divergence is essential for improving investment decisions and supporting the development of sustainable finance.