Agree to Disagree? Disentangling ESG Rating Disagreement and its Impact on Stock Returns

Abstract: This study investigates the phenomenon of ESG rating disagreement and its financial implications. Using a sample of the largest firms listed on the Nordic markets, we examined whether disagreement in ESG ratings from five widely used rating agencies between 2018-2022 positively affected the underlying stock returns. Specifically, a multivariate OLS regression was conducted for stock returns on ESG rating disagreement while controlling for standard firm characteristics that are known return predictors. While we confirm that ESG rating disagreement exists in the Nordics, we do not find a positive relation between rating disagreement and stock returns, as opposed to previous research within the field. Theoretical explanations concerning risk diversification and the varying financial materiality of ESG ratings strengthen our results, though empirical limitations are also acknowledged. The findings of this study are therefore indicative, but not statistically conclusive, that ESG rating disagreement does not have a stock return implication in the Nordics.