ESG disclosure vs. ESG ratings: Consistent information value?

We perform textual analysis of annual reports and examine the consistency between firms' ESG rating and firms' ESG disclosure. The paper contributes to the ESG literature by combining two mostly separately investigated research topics: the ESG ratings and the ESG disclosure. This is important as market participants use both sources for decision-making. We develop two different word lists to analyze the ESG information value from a rating agency-perspective and from the academic literature perspective. Our results show that using a comprehensive ESG-related word list from academic studies can explain a substantial proportion of several ESG ratings, indicating that market participants can use firm disclosure as an approximation for several ESG ratings. Given that ESG rating agencies use public information, our study sheds a light on the information value from different information channels which is important for market participants. Moreover, the differences in the information value reveal the difficulties in using ESG ratings and the issue of rating dispersions.