Disagreement among ESG rating agencies: shall we be worried?

Lopez, Claude and Contreras, Oscar and Bendix, Joseph (2020): Disagreement among ESG rating agencies: shall we be worried?

Abstract

In this study, we show that using a common set of variables would partially resolve inconsistencies and the lack of comparability across rating providers that often confuse investors. Furthermore, we dissociate the impact of the rating agencies’ different focus on “E”, “S” or “G” from that of using different data. While the former, if properly disclosed, can be useful as it allows investors to choose what rating will be more in line with their preferences, the latter necessarily requires harmonization of the data collected.

• Item Type: MPRA Paper
• Language: English
• Keywords: ESG ratings, machine learning, Environmental, Social governance,
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C14 - Semiparametric and Nonparametric Methods: General; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling; G - Financial Economics > G1 - General Financial Markets > G10 - General; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General

References

Berg, F., J. Koelbel, and R. Rigobon. 2020. "Aggregate Confusion: The Divergence of ESG Ratings." MIT Sloan Working Paper 5822-19.

BNP Paribas. 2019. The ESG Global Survey 2019. Breiman, L. 2001. "Random Forests." Machine learning.

Clarkin, C. M., M. Sawyer, and J. L. Levin. 2020. "The Rise of Standardized ESG Disclosure Frameworks in the United States." Harvard Law School Forum on Corporate Governance. Monday, June 22.

Friede, G., T. Busch, and A. Bassen. 2015. "ESG and Financial Performance: Aggregated Evidence from More than 2000 Empirical Studies." Journal of Sustainable Finance & Investment, 5(4), 210-233.

Friedman, J. H., and B. E. Popescu. 2008. "Predictive Learning via Rule Ensembles." The Annals of Applied Statistics.

Fritsch, D. 2019. ESG: Do you or Don't you? Are the World's Asset Owners Thinking about Long-Term, Sustainable Finance? Responsible Investor Research, UBS.

Gaffuri, Jvan. 2017. RobecoSAM CSA. Lisbon.

Gibson, R., P. Krueger, N. Riand, and P. S. Schmidt. 2019. "ESG Rating Disagreement and Stock Returns." ECGI Working Paper Series in Finance, N° 651/2020.

Global Sustainable Investment Alliance. 2019. 2018 Global Sustainable Investment Review.

Grim, M. D., and D. B. Berkowitz. 2018. ESG, SRI, and Impact Investing: A Primer for Decision-Making. Vanguard Research.

Grimminger, A., and P. D. Benedetta. 2013. Raising the Bar on Corporate Governance: A Study of Eight Stock Exchange Indices. World Bank Group.

Koehler, D., and E. Hespenheide. 2013. "Finding the Value in Environmental, Social and Governance Performance." Deloitte Review Vol. 12 (January).

Lauricella, T. 2020. "4 Lessons from BlackRock's Bold Sustainable Investing Statement." Morningstar. https://www.morningstar.com.au/funds/article/4-lessons-from-blackrocks-bold-sustainable-in/198904

Li, X., Y. Wang, S. Basu, K. Kumbier, and B. Yu. 2019. "A Debiased MDI Feature Importance Measure for Random Forests." Advances in Neural Information Processing Systems.

Novick, B. 2020. "Towards a Common Language for Sustainable Investing." Harvard Law School Forum on Corporate Governance. Wednesday, January 22

State Street Global Advisors. 2018. Performing for the Future. ESG's Place in Investment Portfolios. Today and Tomorrow. 2017 ESG Survey Report.

State Street Global Advisors. 2019. The ESG Data Challenge. March.

Sustainalytics. 2019. The ESG Risk Rating: Methodology Abstract. Version 2.0.

Thomson Reuters. 2018. Thomson Reuters ESG Scores. US SIF Foundation. 2018. Report on US Sustainable, Responsible and Impact Investing Trends.

Verheyden, T., R. G. Eccles, and A. Feiner. 2016. "ESG for All? The Impact of ESG Screening on Return, Risk, and Diversification." Journal of Applied Corporate Finance, 28(2), 47-55.

Wong, C., and E. Petroy. 2020. Rate the Raters 2020: Investor Survey and Interview Results. Sustainability.