Market-oriented environmental regulation and ESG rating divergence

In the context of sustainable development and low-carbon transformation, the divergence of environmental, social, and governance (ESG) ratings heightens investors' perception of market risk and hinders the growth of socially responsible investment. Through a quasi-natural experiment of the carbon market, we empirically investigate the impact of market-based environmental regulations on ESG rating divergence. We find that firms covered by the carbon market reduced their ESG rating divergence by about 3.7 % relative to a control group of other firms, and the dynamic effect of the policy exhibits an inverted U-shape. We reason that media and analyst attention amplifies the signal transmission and external supervision channels, thereby reducing ESG rating divergence. We also find carbon markets mitigate ESG rating divergence among corporations in regions with higher levels of marketization, while administrative order-type environmental regulations are ineffective. Additionally, the carbon market reduces ESG rating divergence for state-owned enterprises, corporations with high political connections, and corporations with high audit quality.