The relation between ESG rating divergence and a firm's financial performance.

Considering raising concerns about climate change and our future, the importance of sustainability is being emphasized more and more for companies and investors. Both investors and companies are attempting to be more responsible in their investment and operations in accordance with sustainability. ESG rating providers are one of the key elements in sustainability that investors and corporations are rely on their assessment and evaluation. Alongside their widespread adoption, ESG ratings are being condemned for their inconsistency. Although previous research has extensively explored the influence of ESG rates on financial performance, few studies have attempted to demonstrate the impact of heterogeneity on corporate financial performance. Thus, this study examines how divergence in environment, social and governance (ESG) rating impact on financial performance, both accounting and market base. The study is conducted on firms with more than 500 employee located in the Europe and North America during the period of 2014-2020. The data used in this thesis is based on the most prominent rating providers KLD and Refinitiv (Asset4). This study first investigates the variation in individual ESG pillars. We found that there is a significant difference between providers, both cross-sectional and over time. We revealed that the convergence of Refinitiv and KLD in the environmental dimension is greater than in the social and governance dimensions. Our findings reveal that divergence scores have a considerable influence on market-based financial performance (Tobin's Q), implying that the market is primarily interested in these measuring methods for decision making.

Considering raising concerns about climate change and our future, the importance of sustainability is being emphasized more and more for companies and investors. Both investors and companies are attempting to be more responsible in their investment and operations in accordance with sustainability. ESG rating providers are one of the key elements in sustainability that investors and corporations are relying on their assessment and evaluation. Alongside their widespread adoption, ESG ratings are being condemned for their inconsistency. Although previous research has extensively explored the influence of ESG rates on financial performance, few studies have attempted to demonstrate the impact of heterogeneity on corporate financial performance. Thus, this study examines how divergence in environment, social and governance (ESG) rating impact on financial performance, both accounting and market base. The study is conducted on firms with more than 500employeese located ie Europe and North America during the period of 2014-2020. The data used in this thesis is based on the most prominent rating providers KLD and Refinitiv (Asset4). This study first investigates the variation in individual ESG pillars. We found that there is a significant difference between providers, both cross-sectional and over time. We revealed that the convergence of Refinitiv and KLD in the environmental dimension is greater than in the social and governance dimensions. Our findings reveal that divergence scores have a considerable influence on market-based financial performance (Tobin's Q), implying that the market is primarily interested in these measuring methods for decision making.