The Influence of Regulatory Oversight on Environmental, Social, and Governance Ratings

Abstract

Firm performance in the specific areas of environmental stewardship, social responsibility, and corporate governance (ESG) has become an important criterion that investors use in determining a firm’s value. This empirical investigation, based on stakeholder theory examines the relationship between regulatory oversight and third-party ESG ratings. Our research methodology involved quantitative, observational, and retrospective analyses. The study population consisted of 471 firms from two heavily regulated industry sectors—the utility and financial sectors—and from two less regulated sectors—the information technology and consumer discretionary sectors. We compiled the ESG ratings for the firms from two independent rating services. The quantitative evaluation included multiple regression analysis and multiway frequency analysis. The findings show a statistically significant difference for firms in heavily regulated sectors compared to the ratings for firms in less regulated sectors for the environmental and governance component ratings. This study provides information to help stakeholders recognize the influence of regulation on ESG ratings and explains to investors and company leaders why ESG ratings vary among different industry sectors. This study was limited to four specific sectors but may provide insights applicable to other sectors based on regulatory intensity.