Credit ratings clients of Moody's, S&P had better ESG scores: SMU study
A scholarly investigation has found a positive correlation between the environmental, social and governance (ESG) scores given to companies by Moody’s and S&P, and their status as paying clients of the ratings agencies. The researchers from SMU were careful to caveat their findings are still preliminary, but the correlation suggests score inflation cannot be ruled out and that there is a need to carefully manage conflicts of interest. The study also found that the increase in scores was more pronounced for companies that disclosed relatively less information on their ESG performance, which the researchers said could have made it easier for manipulation to take place. The working paper, which was presented and discussed at the inaugural Nanyang Business School Accounting Conference on Thursday (May 19), was co-authored by SMU PhD student Li Xuanbo, SMU Associate Professor of Accounting Lou Yun, and SMU Professor of Accounting Zhang Liandong. Given the findings, the researchers said investors should be aware of potential conflicts of interest when they use ESG ratings to guide their investments.