This paper examines how increased competition across ESG rating agencies impactsincumbents’ ESG rating disagreements and rating quality. We exploit as exogenous shock torating competition the entrance of Sustainalytics as an additional rating agency. Ourdifference-in-differences analysis reveals that incumbents’ ESG rating disagreementdecreases in response to increased competition for firms additionally covered bySustainalytics (treatment) relative to firms not covered by Sustainalytics (control). Consistentwith this decreased disagreement being attributable to better rating quality, we find thatincumbents’ ESG concerns are more strongly associated with future negative ESG newsincidents for the treatment group relative to the control group. Examining whetherincumbents exert more effort in response to increased competition, we find one incumbent(i.e., KLD) rates more ESG dimensions in response to increased rating competition. Finally,incumbents are more likely to newly cover firms in the post period that are covered bySustainalytics. Overall, these findings are consistent with decreases in rating disagreementsstemming from increased efforts and higher quality by the incumbents in response toincreased competition.

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