Aggregate Confusion: The Divergence of ESG Ratings

TLDR

The paper investigates why ESG ratings differ across six major agencies. The authors map each agency’s methodology onto a common taxonomy and decompose rating differences into scope, measurement, and weight components. They find measurement explains 56 % of the divergence, scope 38 %, weight 6 %, and identify a rater effect that biases category measurements, underscoring the need for better data generation.

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.