Aggregate Confusion: The Divergence of ESG Ratings. (23rd May 2022)

• Record Type: Journal Article
• Authors: Berg, Florian; Kölbel, Julian F; Rigobon, Roberto
• Is Part Of: Review of finance. Volume 26:Number 6(2022)
• Page Start: 1315
• Page End: 1344
• Publication Date: 2022-05-23
• Subjects: Corporate social responsibility -- Corporate sustainability -- ESG ratings -- Divergence; M14 -- G24; Finance -- Europe -- Periodicals; Financiën; Finance; Periodicals; 332.09405
• DOI: 10.1093/rof/rfac033
• Languages: English
• ISSNs: 1572-3097

Abstract

Abstract: This paper investigates the divergence of environmental, social, and governance (ESG) ratings based on data from six prominent ESG rating agencies: Kinder, Lydenberg, and Domini (KLD), Sustainalytics, Moody's ESG (Vigeo-Eiris), S&P Global (RobecoSAM), Refinitiv (Asset4), and MSCI. We document the rating divergence and map the different methodologies onto a common taxonomy of categories. Using this taxonomy, we decompose the divergence into contributions of scope, measurement, and weight. Measurement contributes 56% of the divergence, scope 38%, and weight 6%. Further analyzing the reasons for measurement divergence, we detect a rater effect where a rater's overall view of a firm influences the measurement of specific categories. The results call for greater attention to how the data underlying ESG ratings are generated.