ESGM: ESG scores and the Missing pillar

23 Pages Posted: 24 Jul 2021

See all articles by Özge Sahin

Özge Sahin

Technische Universität München (TUM)

Karoline Bax

University of Trento - Department of Economics and Management

Sandra Paterlini

University of Trento - Department of Economics and Management

Claudia Czado

Technische Universität München (TUM)

Date Written: July 21, 2021

Abstract

Environmental, social, and governance (ESG) scores measure companies’ activities concerning sustainability and are organized on three pillars: Environmental (E-), Social (S-), and Governance (G-). Different approaches have been proposed to compute ESG scores for companies, which rely on the aggregation of many sources of information. These complementary non-financial ESG scores should provide information about the ESG performance and risks of different companies. However, the extent of missing information makes the reliability of ESG scores questionable. To account for the missing information in the underlying ESG pillars, we introduce a new pillar, the so-called Missing (M-) pillar, and propose an optimization approach to compute new ESG (ESGM) scores, which should be related to the company riskiness. The ESGM scores incorporate the extent of missing information and establish some meaningful relationship concerning the riskiness of the companies under consideration. Interesting insights into the current limitations of the ESG scoring methodology are discussed.

Keywords: Dependence, ESG pillar, ESG rating methodology, missing data, risk

JEL Classification: C61, G32, M14

Suggested Citation

Sahin, Özge and Bax, Karoline and Paterlini, Sandra and Czado, Claudia, ESGM: ESG scores and the Missing pillar (July 21, 2021). Available at SSRN: https://ssrn.com/abstract=3890696 or http://dx.doi.org/10.2139/ssrn.3890696

Özge Sahin (Contact Author)

Technische Universität München (TUM) ( email )

Boltzmannstr. 3
Garching, 85748
Germany

Karoline Bax

University of Trento - Department of Economics and Management ( email )

Via Inama 5
Trento, I-38100
Italy

Sandra Paterlini

University of Trento - Department of Economics and Management ( email )

Via Inama 5
Trento, I-38100
Italy

Claudia Czado

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, DE 80333
Germany

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