The impact of ESG risk disagreements on stock returns and volatility in Europe

Abstract

This study examines the impact of Environmental, Social, and Governance risk disagreements on the annual average level and volatility of daily stock returns. By employing a proxy for rating disagreement based on ESG risk ratings from two leading providers, the analysis reveals that ESG disagreements significantly increase stock return volatility. This finding remains robust across different methods of measuring rating disagreement. Furthermore, industry-adjusted ESG rating disagreement is shown to exacerbate volatility. Addressing a gap in the literature regarding the effects of ESG risk disagreement on stock market behavior, this study enhances understanding of how inconsistencies among ESG rating agencies influence financial markets. The research utilizes a filtered sample of 1005 publicly listed firms with available ESG ratings, focusing on data from the most recent year. The methodology combines cross-sectional analysis and volatility modeling to ensure rigorous examination. The findings provide critical insights for investors, emphasizing the necessity of evaluating differences in ESG assessments when making investment decisions. These results also underscore the broader implications for asset pricing and risk management in financial markets. 

Keywords: Asset pricing; ESG risk; rating disagreement; stock returns; volatility