If you believe the ESG hype, high scores on ESG metrics indicates high levels of corporate social responsibility. There has been a lot of work discrediting that proposition (much of which is discussed in my book The Profit Motive). And now there is more evidence:
In this paper, we study the impact of environmental, social and governance (ESG) ratings on the likelihood of subsequent corporate scandals. We find that the ‘S’ score (social responsibility) has a predictive power on scandals, while the overall ESG ratings has not. This finding holds for all our specifications. The underlying question that we want to address with this paper is whether the ratings reflect firms’ real efforts to act responsibly towards the society, or whether it constitutes deception. Our work contributes to the ongoing ‘aggregate confusion’ discussion amongst ESG scholars, showing that there is little informational content in an aggregate score (as it measures very diverse dimensions). Contrary to our expectation, the ‘S’ score is positively correlated with the likelihood of corporate scandals, suggesting that the ‘S’ score does not live up to measuring a company’s social responsibility, including the ‘commitment to being a good corporate citizen’ (Refinitiv, 2022). Our analysis is based on a hand-collected matched sample of 113 global corporate scandals.
Kjaer, Christina and Kirchmaier, Tom, Deceived by ‘S’: Corporate Scandals and ESG (April 25, 2023). Available at SSRN: https://ssrn.com/abstract=4428468 or http://dx.doi.org/10.2139/ssrn.4428468
