European Finance Review· 2022
Aggregate Confusion: The Divergence of ESG Ratings
- 2,843citations
- 2022year
Short summary
Environmental, Social, and Governance (ESG) ratings from six major agencies diverge significantly due to differences in how they measure company performance, with measurement accounting for 56% of this divergence.
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Key points
- Six major ESG rating agencies show significant divergence in their company ratings.
- Measurement differences account for 56% of the divergence, followed by scope (38%) and weight (6%).
- A 'rater effect' was identified, where an agency's general view of a company impacts specific metric assessments.
- The findings underscore the need for more attention to the data generation processes behind ESG ratings.
AI-generated from the title and abstract; the full text is not read.
Abstract
Abstract This paper investigates the divergence of environmental, social, and governance (ESG) ratings based on data from six prominent ESG rating agencies: Kinder, Lydenberg, and Domini (KLD), Sustainalytics, Moody’s ESG (Vigeo-Eiris), S&P Global (RobecoSAM), Refinitiv (Asset4), and MSCI. We document the rating divergence and map the different methodologies onto a common taxonomy of categories. Using this taxonomy, we decompose the divergence into contributions of scope, measurement, and weight. Measurement contributes 56% of the divergence, scope 38%, and weight 6%. Further analyzing the reasons for measurement divergence, we detect a rater effect where a rater’s overall view of a firm influences the measurement of specific categories. The results call for greater attention to how the data underlying ESG ratings are generated.
The authors' abstract, as published at the source. European Finance Review, 2022 · DOI ↗
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Field: Strategy and Management
Strategy and ManagementBusiness, Management and Accounting