Ratings of Mass Confusion: ESG and Corporate Environmental Impact
Summary
Environmental, Social, and Governance (ESG) - the catch-all phrase for corporate socially conscious initiatives. Of interest to us are the sustainability projects undertaken by corporations big and small - whether for greenwashing, or genuine philanthropy. And many investors want to focus specifically on only giving money to companies who specialize in such campaigns. Fortunately, several ratings systems tell us exactly how to invest ethically.
With over 3,038 investors, representing more than $100 trillion in assets, committed to integrating ESG information into their decision-making processes, the importance of corporate ESG ratings is undeniable. However, a notable challenge with ESG ratings is the substantial disagreement among different providers. Studies, including a recent one from Berg, et al (2021), have highlighted that correlations between the ESG ratings from different agencies can vary widely, even when comparing ratings from well-known agencies like KLD, Sustainalytics, Moody’s ESG, etc. The question is: how can we truly measure the impact of corporate sustainability campaigns?
The Importance of Standardization
This variability in ESG ratings introduces a layer of uncertainty for decision-makers, posing a significant challenge for investors, companies, and researchers alike. Addressing this issue requires a concerted effort to standardize ESG assessment criteria and improve the transparency and methodology behind ESG ratings.
Most significantly, the authors of this study conclude that “To achieve that, companies should work with rating agencies to establish appropriate metrics and ensure that the data they disclose are publicly accessible.”
Assessing the Data
The raw data in this study shows across the six different rating systems examined, there are 709 indicators to a total of sixty-four distinct categories. In various graphs and tables, we are shown how the ratings are weighted differently across different systems as well as differences in scope
A Path Forward
As difficult and unlikely as it may sound, the only sensible solution for the problem of differing ratings and standards for ESG projects is to make the raw data public and accessible for researchers and the broader public to study.
It’s easy to say “trust the experts”. But when there’s this much disagreement among experts, it’s high time that the public can see the numbers and decide for themselves who is making an impact, and who is engaged in greenwashing.
Open Data & Code
Supplementary data are available at Review of Finance online. rfac033_Supplementary_Data - pdf file