ESG Scores. A Critical Review of Sustainability Measurement

Table of Contents

1. Introduction

2. ESG and its investment approach

3. Origin of ESG scores

3.1 Agencies and their methodologies

3.1.1 MSCI ESG

3.1.2 Refinitiv

3.1.3 Sustainalytics

3.1.4 RobecoSAM

3.1.5 ISS-oekom

3.2 Comparison of the agencies

4. Consistency and comparability of ESG scores

4.1 Empirical findings and main drivers of ESG score divergence

4.2 Empirical findings and issues on ESG score comparability

5. Impact of ESG scores

5.1 Effects on companies’ ESG stock return and risk

5.1.1 ESG scores

5.1.2 ESG score divergence

5.2 Effects on companies’ daily business

6. Discussion

7. Conclusion

Objectives and Core Topics

This thesis examines the measurement of sustainability via ESG scores, focusing on the significant divergence between different rating agencies. The primary objective is to clarify why such discrepancies occur, analyze their impact on capital markets and company performance, and determine whether these scores offer the consistency and reliability that investors require for sustainable investment decisions.

• Methodologies of leading ESG rating agencies (MSCI, Refinitiv, Sustainalytics, RobecoSAM, ISS-oekom).
• Main drivers of ESG score divergence (scope, measurement, and weighting methodologies).
• Impact of ESG score changes and divergence on stock returns and risk factors.
• Corporate responses to ESG assessments and their effect on daily business operations.

Excerpt from the Book

Summary of Chapters

1. Introduction: Outlines the growing importance of ESG in society and capital markets, while highlighting the research problem of significant score divergence between agencies.

2. ESG and its investment approach: Defines the core pillars of ESG and discusses how the concept is integrated into investment strategies by restricted versus unrestricted investors.

3. Origin of ESG scores: Details the methodologies of five major agencies and compares their approaches regarding data sources, weighting, and update frequencies.

4. Consistency and comparability of ESG scores: Analyzes the empirical reasons for score divergence, attributing it primarily to differences in scope, measurement indicators, and weighting, while addressing issues of comparability.

5. Impact of ESG scores: Investigates the economic consequences of ESG scores, specifically their correlation with stock returns, idiosyncratic risk, cost of capital, and corporate management practices.

6. Discussion: Synthesizes the findings and proposes potential solutions for standardization and harmonizing ESG evaluations to overcome current limitations.

7. Conclusion: Summarizes the key insights and reaffirms the necessity for more consistent ESG measurement to support sustainable and informed investment decisions.

Keywords

ESG scores, sustainability measurement, ESG divergence, rating agencies, capital markets, stock returns, idiosyncratic risk, corporate sustainability, ESG investing, weighting, ESG reporting, financial performance, transparency, standardization, cost of capital.

Frequently Asked Questions

What is the core focus of this thesis?

The thesis critically reviews the measurement of corporate sustainability through ESG scores and investigates the reasons for, and impacts of, the significant score divergence observed across various rating agencies.

What are the primary themes discussed?

The core themes include the diverse methodologies of ESG rating agencies, the factors driving score divergence, the impact of these scores on stock market performance and risk, and how companies respond to ESG assessments.

What is the main objective of the research?

The primary goal is to understand why ESG scores for the same company often differ, and to determine whether these scores reliably influence capital markets or corporate business practices.

Which methodology is employed in this thesis?

The work utilizes a literature-based comparative analysis, synthesizing recent academic studies to evaluate agency methodologies and empirical data regarding score divergence and market impacts.

What is covered in the main section of the paper?

The main section details the methodologies of five key agencies, empirically examines the drivers of score divergence, and assesses the effects of these scores on stock returns, risk, and internal corporate decision-making.

Which keywords best characterize the work?

The most important keywords are ESG scores, sustainability measurement, score divergence, rating agencies, stock market impact, and corporate responsibility.

What is the "rater effect" mentioned in the study?

The rater effect describes a phenomenon where analysts tend to evaluate a category similarly to a previous one, introducing subjective bias into the scoring process when hard data is unavailable.

How does ESG score divergence affect investors?

Divergence introduces uncertainty, which is often interpreted as increased risk, leading investors to demand higher stock returns as a risk premium. It also makes direct comparison of corporate sustainability performance difficult.

Do companies change their behavior due to ESG scores?

The study finds that while many companies respond, they often focus on "passive conformity" by improving their ESG reporting rather than fundamentally enhancing their underlying sustainability performance, except for the governance pillar which shows significant responses.

Does a high ESG score lead to lower company risk?

Yes, the research indicates that companies with external ESG scores generally benefit from lower idiosyncratic risk, which provides a strong argument for risk-averse investors to prefer ESG-rated companies.