More profitable firms tended to have lower ESG rating disagreement (perhaps because they were able to dedicate more resources to ESG policies and to their ESG disclosures).Disagreement tended to be higher for the largest firms in the S&P 500 (perhaps due to the complexity of such firms) and for firms that did not have a credit rating (potentially because the information environment for these firms is of lower quality).The average pairwise correlation was lowest for governance (0.16) and highest for the environmental dimension (0.46).The average pairwise correlation between the ESG ratings of the seven rating providers was about 0.45 – in stark contrast with the 0.99 correlation among credit ratings. Following is a summary of their findings: Their database covered ESG ratings from seven data providers (Asset 4, Sustainalytics, Inrate, Bloomberg, FTSE, KLD and MSCI IVA) for a sample of S&P 500 firms between 20. Rajna Brandon, Philipp Krueger and Peter Schmidt contribute to the sustainable investing literature with their study, “ ESG Rating Disagreement and Stock Returns,” published in the September 2021 issue of the Financial Analysts Journal, in which they examined the relationship between ESG rating disagreement and stock returns. Further complicating matters is that Dane Christensen, George Serafeim and Anywhere Sikochi, authors of the 2021 study, “ Why Is Corporate Virtue in the Eye of the Beholder? The Case of ESG Ratings,” published in The Accounting Review, found that greater firm ESG disclosure generally exacerbates ESG rating disagreement rather than resolving it. In addition, the return and risk of ESG funds can differ significantly and are driven by fund-specific criteria rather than by a homogeneous ESG factor. Florian Berg, Julian Kölbel and Roberto Rigobon, authors of the 2019 study, “ Aggregate Confusion: The Divergence of ESG Ratings,” found that most of the divergence in ratings could be traced to measurement and scope divergence, while weight divergence seemed to play a minor role.īecause of the divergence in ratings, funds may not be aligned with investor objectives and beliefs. Third, raters attach different weights to the different categories (“weight divergence”) when generating an aggregated ESG rating. Raters measure identical categories differently (“measurement divergence”). Raters use different categories, which can lead to disagreement (referred to as “scope divergence”). The result is that there can be a wide disparity of ESG ratings for the same company.ĭivergence in ratings has three sources. My August 24, 2020, Novemand Jarticles for Advisor Perspectives presented evidence from research demonstrating that ESG investors face considerable challenges in allocating assets because the data used to construct ESG portfolios differ so widely among providers. 1 While there are seven competing vendors providing ratings to measure how companies perform along ESG standards, those ratings differ widely across vendors. New research shows that those stocks with the greatest divergence had higher performance.īy the end of 2020, there was an estimated $35 trillion of assets (up from $23 trillion in 2016) managed under environmental, social and governance (ESG) principles – ESG investing has entered the mainstream of investing. A well-established problem facing investors with an environmental, social and governance (ESG) mandate is the wide divergence of ratings assigned to companies by different vendors.
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