How ESG Rating Divergence Undermines Financial Flexibility and Sustainable Resilience

Owing to the lack of a unified ESG (environmental, social and governance) rating standard, notable inconsistencies have appeared in ESG ratings assigned to the same firm by various rating agencies. Based on data encompassing Chinese A-share listed companies from 2015 to 2023, this paper investigates the effects of ESG rating divergence on corporate financial flexibility. We find that ESG rating divergence reduces corporate financial flexibility, and the finding remains reliable following various robustness tests. Mechanism tests show that ESG rating divergence diminishes corporate financial flexibility by raising operating leverage and the cost of equity capital, and exacerbating the degree of maturity mismatch between investing and financing. Further, we find that the negative impact of ESG rating divergence on financial flexibility is more pronounced in heavily polluting firms, enterprises with stronger market competitive positions, those facing lower financing constraints and companies with higher analyst earning forecast accuracies. We subsequently explore the economic effects of financial flexibility in reaction to ESG rating divergence. The findings indicate that ESG rating divergence negatively affects corporate sustainable resilience by first reducing financial flexibility. Overall, this study reveals the specific effects and pathways via which ESG rating divergence affects the financial flexibility of firms, holding significant implications for actively promoting the establishment of ESG systems and achieving sustainable corporate growth.