Study shows commercial ties influence ESG ratings and highlights need for regulation

An analysis published in the Journal of Accounting Research uncovers evidence that conflicts of interest arising from commercial ties lead to bias in environmental, social, and governance (ESG) ratings.

Investigators focused on Moody’s and S&P’s acquisitions of ESG rating agencies Vigeo Eiris and RobecoSAM.

Their analysis revealed that after these ESG rating agencies were acquired by Moody’s and S&P, they issued higher ratings to existing paying clients of Moody’s and S&P. Specifically, after the acquisitions, the ESG ratings of existing credit rating clients of Moody’s and S&P increased by 17.16% of the standard deviation of the relative ESG rating.

The increase in ESG ratings after the acquisitions was more pronounced for firms with more intensive business relationships with Moody’s or S&P.

“Our findings highlight the need for regulation to address conflicts of interest in ESG rating agencies and for investors to be mindful of potential biases when relying on these ratings,” said senior author Liandong Zhang, Ph.D., of Singapore Management University.