ESG Rating Divergence and Corporate Financial Performance: A Review of the Measurement Problem

Siqiang An, Mengyun Wei

2026

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DOI 10.71052/hkfb2025/wclt3712
Data confidence 70 medium
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Abstract

One of the best-tested hypotheses in sustainable finance concerns the relation between environmental, social, and governance (ESG) performance and corporate financial performance (CFP). There are well over 2,000 published papers in the last decade, but the results are wildly conflicting, ranging from positive to null to negative, and these findings can arise within the same data sample and methodology. A weak theory cannot explain the discrepancy because three channels (cost of capital, operating efficiency, and valuation premium) lead clearly in the same direction, namely, a positive association. The more likely reason is the poor quality of the ESG measurement. Prior studies document that the pairwise correlations among the six major rating providers covering the same set of companies range between 0.38 and 0.71 with a mean of 0.54, compared to the correlation of 0.99 for Moody’s and S&P credit ratings on the same issuers. Such measurement errors can bias the estimated effect towards zero and make empirical results dependent on which rating provider is used by the authors. Further evidence shows that greater ESG disclosures can lead to wider, rather than narrower, rating divergence, challenging the premise of the recent mandated disclosures. This paper reviews the theoretical rationale for why ESG performance affects financial performance and provides an econometric analysis of how the divergence of ESG ratings occurs and its consequences. It also evaluates the limits of recent developments in regulation, including the International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards (IFRS SDS) and the EU’s Corporate Sustainability Reporting Directive (CSRD). A section is devoted to the Hong Kong market, where both international and mainland Chinese rating agencies rate H‑share issuers under different methodologies, producing institutionally meaningful divergence with portfolio relevance. The paper’s central claim is that the next advance in ESG‑CFP research will come not from more elaborate regression specifications but from resolving the reliability of the measurement instrument itself.