Inside the ESG Ratings: (Dis)agreement and Performance

42 Pages Posted: 12 Jan 2021

See all articles by Monica Billio

Monica Billio

University of Venice - Department of Economics; Ca Foscari University of Venice - Dipartimento di Economia

Michele Costola

Ca' Foscari University of Venice

Iva Hristova

Ca Foscari University of Venice

Carmelo Latino

Leibniz Institute for Financial Research SAFE

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE; Ca Foscari University of Venice - Dipartimento di Economia

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Date Written: July 12, 2020

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 affect sustainable investments leading to the identification of different investment universes and consequently to the creation of different benchmarks. This implies that in the asset management industry it is extremely difficult 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 effect of preferences of ESG investors on asset prices, to the point that even when there is agreement, it has no impact on financial performances.

Keywords: Corporate Social Responsibility, ESG Rating Agencies, Sustainable Investments

JEL Classification: M14, G24, G11

Suggested Citation

Billio, Monica and Billio, Monica and Costola, Michele and Hristova, Iva and Latino, Carmelo and Pelizzon, Loriana, Inside the ESG Ratings: (Dis)agreement and Performance (July 12, 2020). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 17/WP/2020, Available at SSRN: https://ssrn.com/abstract=3764493 or http://dx.doi.org/10.2139/ssrn.3764493

Monica Billio

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

HOME PAGE: http://www.unive.it/persone/billio

University of Venice - Department of Economics ( email )

Fondamenta San Giobbe 873
Venezia 30121
Italy
+39 041 234 9170 (Phone)
+39 041 234 9176 (Fax)

Michele Costola (Contact Author)

Ca' Foscari University of Venice ( email )

Cannaregio 873
Venice, 30121
Italy

Iva Hristova

Ca Foscari University of Venice ( email )

Carmelo Latino

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.safe-frankfurt.de

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

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