Berg, Kölbel, and Rigobon (2019)

Berg, Florian, Julian Kölbel, and Roberto Rigobon. “Aggregate Confusion: The Divergence of ESG Ratings.” MIT Sloan Research Paper No. 5822-19, August 20, 2019.

From the conclusion:

“For companies, the results highlight that there is substantial disagreement about their ESG performance. The divergence happens not only at the aggregate level but also in relatively specific sub-categories of ESG performance, such as human rights or energy. This situation might frustrate attempts by companies to improve, because the chance that their efforts are recognized consistently by ESG rating providers is small. In many cases, improving scores with one rating provider is unlikely to result in improved scores at another. Thus, in their current form, ESG ratings do not play a role as important as potentially possible in guiding companies towards improvement. To change the situation, companies should work with rating agencies to establish open and transparent disclosure standards and ensure that the data is publicly accessible. If companies fail to do so, the demand for ESG information will push rating agencies to base the creation of the data on other sources prone to divergence.

“Finally, for rating agencies, the paper diagnoses a fundamental problem of the ESG rating industry itself, namely that differences between raters are not merely differences in opinion, but differences in measurement. The presence of the rater effect has implications for the organizational structure of rating agencies. The data shows that one rater’s view of a particular company strongly correlates across different categories. Future research should explore why this occurs.”

Links:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3438533

http://web.mit.edu/rigobon/www/aggregate-confusion-project.html