Navigating the <scp>ESG</scp> Maze: The Impact of Rating Divergence on Firm Performance in Emerging Markets

ABSTRACT This study investigates the impact of environmental, social, and governance (ESG) rating divergence on firm performance, focusing on A‐share listed firms in China from 2009 to 2022. Using panel data analysis, we provide empirical evidence that ESG rating divergence is negatively associated with firm financial performance. The effect is more pronounced among high‐carbon firms, those disclosing ESG reports, firms audited by non‐Big 4 auditors, and those with higher costs of debt. Crucially, we assess the moderating role of the 2021 CSRC ESG disclosure guidelines and find that regulation does not alleviate this penalty; instead, the negative effect of ESG divergence becomes more pronounced in the post‐regulation period. This indicates that disclosure mandates alone, without harmonized evaluation standards, can inadvertently amplify market penalties. The results further show that these negative effects intensified following external shocks such as the 2015 stock market crash and the COVID‐19 pandemic. The study contributes to the ESG literature by highlighting the economic risks of rating divergence and offering a critical policy insight: effective ESG governance requires moving beyond transparency to actively standardize rating methodologies to reduce informational frictions and improve sustainable capital allocation.