Person:

Serafeim, Georgios

We investigate whether ESG ratings predict future ESG news and the associated market reactions. We find that the consensus rating predicts future news, but its predictive ability diminishes for firms with large disagreement between raters. Relation between news and market reaction is moderated by the consensus rating. In the presence of high disagreement between raters, the relation between news and market reactions weakens while the rating with most predictive power predicts future stock returns. Overall, while rating disagreement hinders the incorporation of value relevant ESG news into prices, ratings predict future news and proxy for market expectations of future news.

Analyzing data from approximately 1.5 million employees across 1,108 established public and private U.S. companies, we find that the strength of employee beliefs related to purpose is weaker in public companies. Among public companies, those beliefs are stronger for firms with more committed owners. These patterns are most pronounced within the salaried middle and hourly ranks rather than senior executives. Differences across firms can be attributed, in part, to differences in leadership and incentive characteristics. Our findings are consistent with higher owner commitment and the corresponding policies that arise alongside this higher commitment, enabling a stronger sense of purpose inside organizations. (Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.4618 .)

We review the pricing and ownership of green bonds, whose proceeds are used for environmentally focused purposes. After presenting an overview of the literature on green securities and green bonds in particular, we summarize the US corporate and municipal green bond markets. Green municipal bonds provide the best opportunity for detailed empirical study of how pricing and ownership differ from those of ordinary bonds. Green bonds are issued at a small premium of several basis points over similar ordinary bonds except when they are issued simultaneously with ordinary bonds from the same issuer; in that situation, a premium emerges over time on the secondary market. Green bonds, especially small or nearly riskless ones, are also more closely held than ordinary bonds. These facts are consistent with a simple framework that incorporates assets with nonpecuniary utility.

Combining corporate sustainability performance scores based on environmental, social, and governance (ESG) data with big data measuring public sentiment about a company’s sustainability performance, I find that the valuation premium paid for companies with strong sustainability performance has increased over time and that the premium is increasing as a function of positive public sentiment momentum. An ESG factor going long on firms with superior or increasing sustainability performance and negative sentiment momentum and short on firms with inferior or decreasing sustainability performance and positive sentiment momentum delivers significant positive alpha. This low sentiment ESG factor is uncorrelated with other factors, such as value, momentum, size, profitability, and investment. In contrast, the high sentiment ESG factor delivers insignificant alpha and is strongly negatively correlated with the value factor. The evidence suggests that public sentiment influences investor views about the value of corporate sustainability activities and thereby both the price paid for corporate sustainability and the investment returns of portfolios that consider ESG data.

We analyze 109,014 firm–day observations for 3,109 companies and examine market reaction to different ESG news. We find that prices react only to financially material ESG news, and the reaction is larger for news that is positive, receive more news coverage, and related to social capital issues. Using a prediction model based on pre-existing ESG ratings, we separate news into expected and unexpected components and find the market reacts to unexpected news. We conclude that investors are motivated by financial rather than nonpecuniary motive as they differentiate in their reactions based on whether the news is likely to affect fundamentals.

We review the literature on corporate sustainability and provide directions for future research. Our review focuses on three actions: measuring, managing and communicating corporate sustainability performance. Measurement is the least developed of the three and represents promising opportunities for research. Compelling evidence now exists on the role of management control systems, investor pressure and mandated disclosure in improving corporate sustainability outcomes. Research has moved beyond weighing the importance of all sustainability issues equally, with recent studies drawing distinctions between the financial materiality of different sustainability issues. Collectively, this new line of inquiry suggests that improving performance on material sustainability metrics is related to improved financial performance, helping to resolve four decades of inconclusive evidence on the relation between sustainability and financial outcomes. Finally, we review research on how disclosure mediums, accounting standards, information monitors and intermediaries shape the communication of sustainability performance. We conclude with a call for research on how to measure performance in the 21st century when corporate purpose extends beyond shareholder value maximization

Despite the rising use of environmental, social, and governance (ESG) ratings, there is substantial disagreement across rating agencies regarding what rating to give to individual firms. As what drives this disagreement is unclear, we examine whether a firm’s ESG disclosure helps explain some of this disagreement. We predict and find that greater ESG disclosure actually leads to greater ESG rating disagreement. These findings hold using firm fixed effects, and using a difference-in-differences design with mandatory ESG disclosure shocks. We also find that raters disagree more about ESG outcome metrics than input metrics (policies), and that disclosure appears to amplify disagreement more for outcomes. Lastly, we examine consequences of ESG disagreement and find that greater ESG disagreement is associated with higher return volatility, larger absolute price movements, and a lower likelihood of issuing external financing. Overall, our findings highlight that ESG disclosure generally exacerbates ESG rating disagreement rather than resolving it.