Third-Party Provision of Carbon Emission Data and ESG Ratings

ESG ratings are playing an increasingly important role in investment decisions, yet concerns persist regarding their quality and consistency. The paper presented in this Decarbonization Seminar/Joint Seminar ZEW and MISES examines whether the introduction of third-party environmental data affects ESG ratings. The authors leverage the first public release of facility-level emissions data from Climate TRACE (CT), an independent non-profit organization, as a plausibly exogenous shock to the amount of independent and standardized emissions data available to ESG rating agencies. The authors find that ESG rating agencies assign higher assessed ESG risk to firms covered by CT, consistent with agencies incorporating CT data as an incremental input into their assessment models. Moreover, CT coverage is associated with higher predictive power and stronger capital-market implications of ESG ratings, as well as reduced rating divergence across rating agencies. Overall, the findings suggest that independent, standardized data inputs can enhance the informativeness and alignment of ESG ratings.