Inside the ESG Ratings: (Dis)agreement and Performance

Abstract

We analyze the ESG rating criteria used by prominent agencies and show that there is a lack of a commonality in the definition of ESG (i) characteristics, (ii) attributes and (iii) standards in defining E, S and G components. We provide evidence that heterogeneity in rating criteria can lead agencies to have opposite opinions on the same evaluated companies and that agreement across those providers is substantially low. Those alternative definitions of ESG also a↵ect sustainable investments leading to the identification of di↵erent investment universes and consequently to the creation of di↵erent benchmarks. This implies that in the asset management industry it is extremely di cult to measure the ability of a fund manager if financial performances are strongly conditioned by the chosen ESG benchmark. Finally, we find that the disagreement in the scores provided by the rating agencies disperses the e↵ect of preferences of ESG investors on asset prices, to the point that even when there is agreement, it has no impact on financial performances.

Mind the ESG capital allocation gap: The role of index providers, standard‐setting, and “green” indices for the creation of sustainability impact

“…The global market leader by far is MSCI with an estimated market share of 40%, putting the firm way ahead of competitors such as ISS ESG and Sustainalytics (Simpson et al, 2021). But even when comparing the ratings of these large ESG rating providers, researchers found striking divergences in their key building blocks (scope, measurement, and weightings)—or, in other words, “aggregate confusion” (Berg et al, 2022; also Billio et al, 2020). Further, as Crona et al (2021: 620) have argued ESG ratings in their current form capture primarily financial or single materiality (i.e.…”

Unpacking the ESG Ratings:Does One Size Fit All?

“…Persistent issues exist with ESG ratings, primarily due to the absence of standardized methodologies across various rating agencies, resulting in divergent ESG ratings (Billio et al, 2021). Berg et al (2022) underscored the relatively low correlation among different ESG rating providers, approximately 54%, in stark contrast to the nearly 99% correlation observed among credit rating agencies.…”

“…Building on Billio et al (2021), our research deep dives into the rationale of this proposal, analysing key aspect of ESG ratings: (i) equal importance of E, S, and G ratings in defining the overall ESG ratings, (ii) intercorrelation among E, S, and G ratings, (iii) evolution of disagreement in E, S, G, and ESG ratings over time, and (iv) the identification of specific ESG issues linked to higher ESG ratings.…”