Are environmental, social and governance (ESG) ratings reliable indicators of emissions outcomes? A case study of the airline industry

Abstract

We analyse environmental ratings and emissions scores for commercial airlines from several major environmental, social and governance ratings providers. Specifically, we investigate whether emissions scores capture and predict absolute carbon emissions and emissions intensity levels, and whether scores are consistent across providers. This builds on existing literature by evaluating the predictive ability of ratings over significantly longer periods than past studies, examining within‐industry ratings disagreement for carbon emissions scores, and using an industry‐specific emissions intensity metric. Data covers 57 airlines from 2012 to 2021. Cross‐sectional and panel regressions are estimated to investigate whether ratings capture and predict carbon emissions data. We find no evidence that emissions scores capture or predict reported carbon emissions, and find that scores from different providers diverge substantially. Persistent shortcomings may undermine trust in the ratings industry, create trade‐offs between emissions abatement and ratings improvement, and hinder the incorporation of climate‐related information in capital allocation decisions.

How can organizations measure the integration of environmental, social, and governance (ESG) criteria? Validation of an instrument using item response theory to capture workers' perception

“…By establishing clear metrics and reporting frameworks, companies are compelled to disclose relevant information regarding their environmental impacts, social practices, and governance structures (Cregan et al, 2023). Transparent reporting enables stakeholders to assess a company's performance, identify areas of strength and weakness, and make informed decisions (Doni & Fiameni, 2023).…”

“…Environmental factors encompass a wide range of indicators to measure this criterion, such as carbon emissions (Cregan et al, 2023), water footprint (Vanham & Mekonnen, 2021), and waste management (Yuan et al, 2023). Social factors encompass diverse aspects, such as labor practices, human rights, corruption (Semenova & Hassel, 2019), and also gender and racial diversity (Eliwa et al, 2023), and board diversity (Gow et al, 2023).…”