Local vs Foreign ESG Raters: Evidence from China
Dr. Aaron Yoon
Assistant Professor of Accounting & Information Management
Kellogg School of Management
We compare local and foreign ESG raters in a large emerging market. Using the case of China, which is one of the very few markets outside of the US with a significant local ESG rater presence, we compare local and foreign ESG raters’ predictive ability of future ESG news. We find that the local rater has superior predictive ability of future ESG news than the foreign rater. The local rater better predicts social and governance issues related to corruption, employment conditions, and legal violations that likely need the local context to analyze and distill. We also find that the local rater’s superior performance is more salient among firms that rely on relationship based transactions and political connections. Overall, we conclude that local context and proficiency is an important factor for ESG ratings to be more relevant in emerging markets.