Do ESG Ratings and Violation Records Complement or Substitute Each Other? Evidence from Predicting Future ESG News

Date of Award

Spring 5-2026

Degree Name

Bachelor of Science (BS)

Advisor(s)

Grace Lee

Abstract

As ESG investing gains widespread importance, investors increasingly rely on ESG ratings to assess firms' ESG risk. However, questions remain about whether ratings alone provide a full picture of corporate ESG behavior. ESG violation records offer a complementary source of information, objective and publicly available, but largely unmonitored due to their low financial materiality. This study examines the predictive power of ESG ratings and ESG violation records as distinct signals of future negative ESG news, applying a salience framework to explain why violation records contain predictive information not fully captured by ratings alone. Panel regressions are used to estimate the relation between each signal and future negative news for U.S. public firms. The results provide evidence that ESG ratings and violation records are complementary predictors of future negative ESG news. Higher ESG ratings are associated with fewer future negative news events, while higher violation counts predict more future negative news. These results are primarily driven by the social dimension when ESG ratings and violation records are disaggregated into social and environmental pillars. However, when the analysis is restricted to environmental news incidents, environmental scores and environmental regulatory violations significantly predict future environmental events. An interaction term analysis reveals that firms maintaining high ratings while accumulating violations are more likely to experience future negative news, suggesting that a good reputation and a negative track record are not mutually exclusive. These findings suggest that reliance on ESG ratings alone may obscure material information contained in publicly available violation records.

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