Do Analysts Care About ESG Performance? Evidence From Tracking Decisions

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Abstract
This study examines the influence of environmental, social, and governance (ESG) performance on analysts' tracking decisions. This study develops a theoretical model involving managers, funds, and brokers. The model finds that under optimal decision‐making conditions, ESG ratings have a positive impact on analyst coverage. Empirical research indicates that ESG performance positively influences analyst coverage in subsequent years. All causal inference methods confirm the significant positive causal effect of ESG performance on analysts' tracking decisions. Heterogeneity analysis shows that analysts pay more attention to ESG ratings for companies with higher market value. The mechanism analysis suggests that strong ESG performance can increase analyst coverage by reducing information asymmetry and attracting mutual fund investors. These findings provide valuable insights into the relationship between ESG performance and analysts' behaviour.

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