Environmental, Social, Governance scores and the Missing pillar - Why does missing information matter?
Corporate Social Responsibility and Environmental Management
27 Pages Posted: 24 Jul 2021 Last revised: 20 Jun 2022
Date Written: May 25, 2022
Environmental, Social, and Governance (ESG) scores measure companies’ performance concerning sustainability and societal impact and are organized on three pillars: Environmental (E), Social (S), and Governance (G). These complementary non-financial ESG scores should provide information about the ESG performance and risks of different companies. However, the extent of not yet published ESG information makes the reliability of ESG scores questionable. To explicitly denote the not yet published information on ESG category scores, a new pillar, the so-called Missing (M) pillar, is formulated. Environmental, Social, Governance, and Missing (ESGM) scores are introduced to consider the potential release of new information in the future. Furthermore, an optimization scheme is proposed to compute ESGM scores, linking them to the companies’ riskiness. By relying on the data provided by Refinitiv, we show that the ESGM scores strengthen the companies’ risk relationship. These new scores could benefit investors and practitioners as ESG exclusion strategies using only ESG scores might exclude assets with a low score solely because of their missing information and not necessarily because of a low ESG merit.
Keywords: Disclosure, ESG investment, ESG methodology, missing data, sustainable finance, Value-at-Risk
JEL Classification: C61, G32, M14
Suggested Citation: Suggested Citation