Do Sustainability Reports Inform Rating Agencies? Evidence from ESG Rating Divergence

Sustainability reports serve as a primary source from which corporate stakeholders acquire and process sustainability-related information. Due to the highly unstructured nature of these reports, however, stakeholders often face considerable costs in processing information, relying more on ESG ratings when making decisions. Analyzing data of three major rating agencies in Korea (i.e., Korea Institute of Corporate Governance and Sustainability, Sustinvest, and ESG Research Institute), we report that the initial issuance of sustainability reports resolves the disagreement among the ESG raters, suggesting that the reports do inform ESG rating agencies and hence help improve the quality of rating products. In addition, we find that raters upwardly adjust their assessment with the reports. We call for further efforts to better structure sustainability reporting to reduce information processing costs of stakeholders.