Aggregate Confusion: The Divergence of ESG Ratings

43 Pages Posted: 20 Aug 2019

See all articles by Florian Berg

Florian Berg

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Julian F Kölbel

University of Zurich, Department of Banking and Finance; MIT Sloan

Roberto Rigobon

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: August 17, 2019

Abstract

This paper investigates the divergence of environmental, social, and governance (ESG) ratings. First, the paper documents the disagreement between the ESG ratings of five prominent rating agencies. The paper proceeds to trace the disagreement to the most granular level of ESG categories that is available and decomposes the overall divergence into three sources: Scope divergence related to the selection of different sets of categories, measurement divergence related to different assessment of ESG categories, and weight divergence related to the relative importance of categories in the computation of the aggregate ESG score. We find that measurement divergence explains more than 50 percent of the overall divergence. Scope and weight divergence together are slightly less important. In addition, we detect a rater effect, i.e., the rating agencies' assessment in individual categories seems to be influenced by their view of the analyzed company as a whole. The results allow investors, companies, and researchers to understand why ESG ratings differ.

Keywords: Corporate Social Responsibility, Corporate Sustainability, ESG Rating Agencies

JEL Classification: M14, G24

Suggested Citation

Berg, Florian and Kölbel, Julian and Rigobon, Roberto, Aggregate Confusion: The Divergence of ESG Ratings (August 17, 2019). MIT Sloan Research Paper No. 5822-19. Available at SSRN: https://ssrn.com/abstract=3438533 or http://dx.doi.org/10.2139/ssrn.3438533

Florian Berg (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02142
United States

Julian Kölbel

University of Zurich, Department of Banking and Finance

Schönberggasse 1
Zurich
Switzerland

MIT Sloan ( email )

100 Main Street
Cambridge, MA 02142
United States

Roberto Rigobon

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-447
Cambridge, MA 02142
United States
617-258-8374 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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