Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/324653 
Year of Publication: 
2025
Series/Report no.: 
New Working Paper Series No. 363
Publisher: 
University of Chicago Booth School of Business, Stigler Center for the Study of the Economy and the State, Chicago, IL
Abstract: 
We explore the role of ESG raters' business models in the production of their ratings, noting that increasingly ESG raters not only produce ESG ratings but also construct and sell index products based on their ESG ratings. We examine whether deriving revenue from ESG rating-based indices is associated with inflated ESG ratings for firms with higher stock returns. Consistent with this notion, we find that raters with strong index licensing incentives issue higher ESG ratings for firms with better stock return performance and those added to their ESG indices, compared to raters with weaker licensing incentives. By comparing ESG ratings for a firm across raters with high versus low index licensing incentives, we control for the firm's fundamental ESG performance. We find that the results hold after accounting for different rating methodologies. Overall, our findings suggest that ESG ratings are associated with index construction incentives, highlighting the need for greater transparency in the incentives of producers of ESG ratings.
Subjects: 
ESG
index providers
rating agencies
sustainability
disclosure
JEL: 
G24
M14
M40
M41
M48
Q56
Document Type: 
Working Paper

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