<scp>How Well Do Social Ratings Actually Measure Corporate Social Responsibility?</scp>

TLDR

Corporate environmental ratings shape billions of socially responsible investment decisions and influence consumers, activists, and potential employees. This study assesses how well KLD ratings reflect past and future environmental performance and discusses implications for stakeholders and research. KLD concern ratings accurately summarize past performance and predict future pollution and compliance violations, whereas strength ratings do not, and KLD ratings are found to underutilize publicly available data.

Abstract

Ratings of corporations' environmental activities and capabilities influence billions of dollars of “socially responsible” investments as well as some consumers, activists, and potential employees. In one of the first studies to assess these ratings, we examine how well the most widely used ratings—those of Kinder, Lydenberg, Domini Research &amp; Analytics (KLD)—provide transparency about past and likely future environmental performance. We find KLD “concern” ratings to be fairly good summaries of past environmental performance. In addition, firms with more KLD concerns have slightly, but statistically significantly, more pollution and regulatory compliance violations in later years. KLD environmental strengths, in contrast, do not accurately predict pollution levels or compliance violations. Moreover, we find evidence that KLD's ratings are not optimally using publicly available data. We discuss the implications of our findings for advocates and skeptics of corporate social responsibility as well as for studies that relate social responsibility ratings to financial performance.