Does Mandatory Sustainability Reporting Decrease ESG-rating Disagreement? A Difference in Differences study on the EU Non-Financial Reporting Directive

Abstract: ESG-ratings are explicitly incorporated in investment decisions by investors with $121 trillion AUM. Ratings are based on diverse sustainability data, which is collected and synthesized by raters with different methodologies. The scores for identical stocks across raters have an observed correlation of 0.54 on average, hence denoted ESG-rating disagreement. This paper asks whether the correlation has improved over time and examines the causal effect of introducing mandatory sustainability reporting on rating disagreement. We apply a difference in differences approach, exploiting that Sweden is subjected to the EU Directive on Non-Financial Reporting (2014/95/EU) while Switzerland is not. We find that a mandatory sustainability reporting requirement did not significantly predict a change in ESG disagreement in general, with the exception for the social score correlation that had an average treatment effect of -0.23. This result should be interpreted conservatively since the empirical setting deviates from the ideal one, with a flawed comparability assumption. The insignificance of the tests could suggest that a broad sustainability reporting requirement has a negligible effect on ESG-score correlation at the country level, with implications for policymakers who aspire to decrease the ESG-rating disagreement.