Global vs. Local ESG Ratings: Evidence from China

ESG ratings that intend to capture firm ESG risk are produced through a largely unified model that incorporates a set of common disclosures decided by each rater. We assess the ability of local and global ESG ratings in capturing covered firms' ESG risk in China. We use firm-level negative ESG incidents that occur within a year of ESG ratings' release as a proxy for raters' ESG risk assessment and examine whether local and foreign ratings have differential predictive ability. We find that local ratings better capture ESG risk that relates to social and governance issues on corruption, employment conditions, and regulatory violations, which often require the local context to incorporate. The outperformance is also salient among firms that rely on relationshipbased transactions and political connections. Our results suggest that the local rater uses local knowledge to inform its model, which makes the ratings more relevant to ESG risk.