Abstract: The boom in Environmental, Social, and Governance (ESG) investing has created a demand for ESG ratings. ESG ratings, unlike credit ratings, measure multiple unrelated categories. We provide a model of ESG ratings competition where raters provide information about these categories and set fees. Raters specializing in different categories maximizes the amount of information transmitted and total surplus, and is the competitive outcome when investors are less concerned about ESG performance. When investor concerns about ESG performance are large enough, the competitive outcome is for them to generalize -- splitting their effort among the categories, resulting in less informative ESG ratings. In this case, generalizing increases the stand-alone value of the ratings, and, hence, the raters' pricing power. The possibility of greenwashing by firms can make generalization the unique equilibrium. We also demonstrate that specialization maximizes ratings disagreement and, thus, empirical measures of disagreement may be poor measures of surplus.
Discussant: Chi-Yang Tsou, University of Manchester
Abstract: In this paper, I study how the political environment impacts the availability of ESG options to individuals. I establish the following judicial channel: because the respect of fiduciary duty is adjudicated by politically-oriented judges, some retirement plans are reluctant to offer ESG options due to litigation risk. I document that there is a significant gap in ESG offerings in retirement plans between conservative and liberal judicial circuits, that is only partially explained by demographic characteristics, firm characteristics, and local political preferences. With a decrease in judicial discretion, which reduces the influence of judges’ political orientations, retirement plans face more uniform treatment between judicial circuits. This closes a substantial share of the gap in the ESG market between jurisdictions, and employees in conservative areas increase their ESG investments more than employees in liberal areas. I find that this effect is mostly driven by green firms, small firms, and firms located in the liberal counties of conservative circuits. Additionally, adding ESG options to the menu leads employees to contribute more overall to their retirement plans.
Jiaying Wei, Southwestern University of Finance and Economics
Steven Xiao, University of Texas-Dallas
Abstract: Using granular barcode-level sales data from retail stores, we show that environmental and social (E&S) ratings positively relate to local sales, especially in counties with more Democratic-leaning and higher-income households. Higher ratings of a firm’s product market rivals negatively affect a firm’s sales. Controlling for product-year-level heterogeneity, monthly product sales decline after negative firm news on E&S issues. Finally, immediately after major natural and environmental disasters, sales in counties close to the disasters become more sensitive to E&S ratings. Our study provides direct evidence that E&S investments affect consumer demand–the cash flow channel of ESG.
