Who should pay for ESG ratings?

Stefano Lovo () and Jacques Olivier ()
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Stefano Lovo: HEC Paris
Jacques Olivier: HEC Paris

No 1547, HEC Research Papers Series from HEC Paris

Abstract: We model how a profit-maximizing agency decides whether to sell ESG ratings to issuers or investors. For firms in sufficiently green sectors or when the proportion of socially responsible investors is large enough, ESG ratings increase expected stock prices and the “issuer pays” business model is more profitable than “investors pay”. When all investors are socially responsible, the model coincides with a model of credit ratings, explaining why credit ratings are sold to issuers while most ESG ratings are sold to investors. Ratings boost equilibrium investment in ESG but their impact on welfare is ambiguous, even for socially responsible investors.

Keywords: ESG; Rating agencies; Investors pay; Issuer pays; emission abatement; incentives; responsible investors (search for similar items in EconPapers)
JEL-codes: G14 G18 G24 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2025-02-22
New Economics Papers: this item is included in nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:1547

DOI: 10.2139/ssrn.5106010

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