THE IMPACT OF ESG RATING DIVERGENCE ON MARKET DYNAMICS AND CORPORATE PERFORMANCE: A SYSTEMATIC LITERATURE REVIEW

Abstract

This study is motivated by the growing importance of Environmental, Social, and Governance (ESG) in global investment decision-making and the increasing inconsistency among ESG rating agencies. This study aims to examine the impact of ESG rating divergence on market dynamics and corporate performance while identifying the key factors underlying such discrepancies. This study employs a Systematic Literature Review (SLR) method using the PRISMA framework to ensure transparency and reproducibility in the study selection process. Data were collected from major academic databases and analyzed qualitatively to identify patterns, trends, and inconsistencies across empirical findings. The findings indicate that ESG rating divergence increases information asymmetry, leading to higher stock price volatility and reduced market liquidity. Furthermore, divergence weakens investor confidence and diminishes the reliability of ESG signals in explaining corporate financial performance. The impact on corporate outcomes is reflected in increased financing constraints, which reduce firm productivity and value, although divergence may generate a risk premium under certain conditions. This study concludes that ESG rating divergence has significant implications for market efficiency and corporate performance, highlighting the need for improved transparency and standardization in ESG assessment practices.