Aggregate Confusion: The Divergence of ESG Ratings

By Florian Berg, Julian F. Kölbel, Roberto Rigobon. Social Science Research Network, 2020

875 citations recorded by the source corpus.

This paper investigates the divergence of environmental, social, and governance (ESG) ratings. Based on data from six prominent rating agencies - namely, KLD (MSCI Stats), Sustainalytics, Vigeo Eiris (Moody's), RobecoSAM (SP Global), Asset4 (Refinitiv), and MSCI IVA- we decompose the divergence into three sources: different scope of categories, different measurement of categories, and different weights of categories. We find that scope and measurement divergence are the main drivers, while weights divergence is less important. In addition, we detect a rater effect where a rater's overall view of a firm influences the assessment of specific categories.

Subfields: Economics and Econometrics, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/cbbddd771bd94fbe2f5d21114ad5b6c75ffea096

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Citations in the corpus

Sustainable development and financial system: IntegratingESGrisks through sustainable investment strategies in a climate change context (2021, methodology): “Since more and more investors rely on ESG ratings from third-party providers, authors have analyzed the lack of homogeneity of their measurements (Saadaoui & Soobaroyen, 2018), the sources of these disagreements (Berg et al., 2019), the effects of these disagreements on stock returns (Gibson et al.”
Inside the ESG Ratings: (Dis)Agreement and Performance (2020, positive): “Our analysis shows that correlations of the ESG ratings are on average 0.57 and range from 0.44 to 0.67, thus confirming the results of Berg et al. (2019).”
Corporate green bonds (2019, neutral): “A caveat of this measure is the subjective nature of ESG ratings (e.g., Berg et al., 2020 ; Chatterji et al., 2016 ).”
Rewriting History II: The (Un)Predictable Past of ESG Ratings (2020, background): “Berg et al. (2020) and Gibson et al. (2019) document large disagreement across major ESG rating providers in their evaluation of firms’ ESG performance.”
Green bonds as a tool against climate change? (2021, background): “More specifically, Berg, Kölbel, and Rigobon (2020) raise several concerns on the reliability of Asset 4 ESG ratings on the grounds of the large rewritings in the scores, which have led to changes in the classification of firms into different quantiles over time.”
ESG and reputation: The case of sanctioned Italian banks (2020, background): “Berg et al. (2019) investigate on the top six rating agencies (KLD [MSCI Stats], Sustainalytics, Vigeo Eiris [Moody's], RobecoSAM [SP Global], Asset4 [Refinitiv], MSCI IVA) and find that raters disagree on both definition and measurement of the different aspects of ESG. Also Semenova and Hassel (201”
Does the ESG Index Affect Stock Return? Evidence from the Eurostoxx50 (2020, methodology): “[12] point out that the divergence in ESG ratings depends on the use of different parameters while evaluating ESG performance: agencies refer to different ESG categories, use a different method to assess such categories and give different importance to each of them.”
Dissecting Climate Risks: Are they Reflected in Stock Prices? (2021, background): “It is well known that such indices are noisy, in the sense that their values differ substantially among different providers (Berg et al. (2020)).”
ESG Rating Disagreement and Stock Returns (2019, background): “(forthcoming) used data from only three rating providers, and Berg et al. (2020) did not focus on the time-series dimension.”