The Influence of Corporate Sustainability Rating Methodology on Disclosure Behavior

The rise of environmental, social, and governance (ESG) investing has illuminated long‐standing concerns over the ability for sustainability rating schemes to accurately convey sustainability‐related performance of firms. This study theorizes and empirically examines how a detailed and transparent rating methodology influences what information firms choose to disclose and how such influence may further decouple the rating from societal outcomes the rating seeks to address. I replicate the scoring methodology of a prominent disclosure mechanism and rating scheme (CDP) and examine the relationships between firm motivation and capacity for strategic response to ratings and carbon emissions. Findings indicate that firms closely attend to rating methodology, both applying greater effort to aspects of disclosure carrying greater rating value and altering disclosure when rating value prescribed by the methodology changes over time. More significantly, higher ratings are not on average associated with better carbon emissions performance.