ESGM: ESG scores and the Missing pillar
23 Pages Posted: 24 Jul 2021
Date Written: July 21, 2021
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: Suggested Citation