Do Environmental, Social and Governance Ratings Signal Corporate Sustainability Risk? Evidence From Environmental, Social and Governance Controversies in S&P 500 Firms

ABSTRACT What do environmental, social and governance (ESG) ratings signal, and who are the stakeholders that respond to the signal? This study investigates the association between ESG ratings and ESG controversies using ratings from Bloomberg, Refinitiv and Sustainalytics, and controversy scores from Refinitiv and Sustainalytics on a sample of S&P 500 companies between 2018 and 2022. Sustainalytics' scores demonstrate consistent statistical significance in explaining ESG controversies, while Bloomberg's and Refinitiv's ESG scores show unintuitive associations. The ESG methodologies of the three raters are examined to understand the variation in inter‐rater efficacy. Differences in conceptualization and measurement lead to variations in efficacy, suggesting that ratings do not signal the same performance outcomes. Therefore, ESG ratings are not fungible and must be assessed against suitable ex‐post performance metrics. Ratings that better explain ex‐post performance should be better suited to support the strategic identification of ESG performance and be more reliable for mapping ESG performance to corporate financial performance.