Aggregate Confusion: The Divergence of ESG Ratings
43 Pages Posted: 20 Aug 2019
Date Written: August 17, 2019
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
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