Original title: Aggregate Confusion: The Divergence of ESG Ratings
ESGEnvironmental, social, and governance issues: three broad areas used to assess a company. ratings assess how a company performs on environmental, social, and governance issues. The paper compares ratings from six agencies and sorts their methods into shared categories. It finds that agencies disagree mostly because they measure those categories differently: measurement accounts for 56% of the divergence, while differences in what they cover account for 38% and differences in weighting for 6%. It also finds a rater effectA pattern in which an agency’s overall view of a firm influences how it assesses specific categories.: an agency’s overall view of a firm can influence how it measures specific categories.
Imagine several people judging how well a meal was made. They may disagree because they consider different parts of the meal, judge the same part differently, or give each part different importance. In this paper, those differences match what rating agencies cover, how they measure categories, and how they weight them. The biggest source of disagreement is how they measure the categories.
Investors and companies use ESG ratings to judge firms, but different agencies can give the same firm different assessments. The paper finds that measurement—the way agencies assess specific categories—accounts for the largest share of this divergence, pointing to the data behind ratings as an important issue.
The abstract reports a comparison of six prominent rating agencies and a decomposition of rating divergence, but does not describe the data period, the detailed methods, or how broadly the findings apply beyond these agencies. It identifies a rater effect but does not state what causes it.
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Aggregate Confusion: The Divergence of ESG Ratings — Florian Berg, Julian Koelbel, Roberto Rigobon B C — European Finance Review — doi:10.1093/rof/rfac033
Abstract licence: CC BY
Explanation generated by Synthesis from the abstract — it is not the original paper.