Diverting attention? Evidence from credit raters’ consideration of ESG

We examine the impact of ESG considerations on credit ratings by analyzing Moody’s acquisition of Vigeo Eiris and S&P's acquisition of RobecoSAM. At the time of acquisition, each credit rater had a coverage overlap with its respective acquired ESG rater. We hypothesize that the coverage overlap would enable the credit raters to integrate ESG factors more prominently into their credit ratings. When there is a coverage overlap, we find that credit ratings show an enhanced ability to predict future negative ESG incidents, while their predictive power for future defaults remains unchanged. Conversely, credit ratings exhibit no significant improvement in predicting future ESG incidents for firms without a coverage overlap but show a marked decline in their ability to predict future defaults. These findings indicate that the integration of ESG may entail a trade-off, i.e., a reduction in the informativeness of credit ratings, given the finite resources and time available to credit raters. Our study underscores both the advantages of incorporating ESG considerations—namely, the increased relevance of credit ratings for ESG risks—and a critical drawback: reduced informativeness of credit ratings, potentially due to a diverted focus on ESG.