The Unreasonable Attractiveness of More ESG Data

Abstract

Sustainable investing is of tremendous interest in both academia and the investment industry. However, despite the interest and the surge of assets under management (AUM) inflow, ESG data currently remains a fundamental challenge as they are deficient in quantity, consistency, and quality. In light of this data challenge, many investors and academics have come to rely on commercial ESG raters to access the ESG quality of various corporations. However, the commercial ESG ratings still suffer some notable biases. This paper documents one possible bias, termed “quantity bias.” The authors found that the amount of ESG data that is available for a given company is positively correlated with the commercial ESG rating of that company, and also the weighted average cost of capital for that company. The implication for investors is that they should do their homework and examine what the ESG data actually say rather than simply “check the box.” For corporations, it implies that they will get favorable treatment in the capital market if they publish more ESG data.

Keywords: ESG, Sustainability, ESG Data, Bias, WACC, ESG Ratings

JEL Classification: C1, D9, G4