Do social ratings provide transparency about past and likely future environmental performance of corporates?
Just like credit ratings improve transparency and efficiency in debt capital markets by reducing the information imbalance between borrowers and lenders, social ratings aim to provide social investors accurate information that makes transparent the extent to which firms’ behaviours are socially and environmentally responsible. Ratings of corporations’ environmental activities and capabilities influence billions of dollars of “socially responsible” investments as well as some consumers, activists, and potential employees.
Despite their increasing popularity, social ratings are rarely evaluated and have been criticized for their own lack of transparency. In one of the first studies to assess these Corporate Social Responsibility (CSR) metrics, the authors examine how well the most widely used ratings – those of Kinder, Lydenberg, Domini Research & Analytics (KLD) – make transparent to stakeholders which companies are environmentally responsible.
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