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

Objectives and Key Themes

This thesis critically reviews the measurement of corporate sustainability using ESG scores. The main objective is to investigate the significant divergence observed in ESG scores across different rating agencies and to analyze its impact on both capital markets and companies' daily operations. The thesis aims to determine the comparability of these scores and their influence on investment decisions and corporate performance. * The ESG concept and its application in investment strategies. * Methodological differences among ESG rating agencies and the resulting score divergence. * The impact of ESG scores on companies' stock returns and risk profiles. * The effects of ESG scores on companies' daily business practices. * The overall significance and implications of ESG score inconsistencies.

Chapter Summaries

1. Introduction: This chapter introduces the growing societal concern for sustainability and its influence on investment decisions. It highlights the increasing demand for reliable sustainability metrics, specifically focusing on ESG scores. The chapter emphasizes the significant divergence among ESG scores provided by different agencies, posing questions about their comparability and impact on investment decisions and corporate performance. It sets the stage for the thesis by outlining its objectives: to investigate the reasons for score divergence, the impact of ESG scores on capital markets and companies, and potential solutions to address the inconsistencies. 2. ESG and its investment approach: This chapter defines the ESG concept – Environmental, Social, and Governance – detailing its three dimensions. It clarifies the environmental dimension's focus on pollution reduction and resource management, the social dimension's emphasis on community relations, employee well-being, and labor standards, and the governance dimension's concern with corporate governance, strategy, and internal controls. The chapter connects ESG to the capital markets by explaining the rise of ESG investing and categorizing investors into unrestricted (ignoring ESG) and restricted (considering ESG) groups. This lays the crucial groundwork for understanding how ESG scores are intended to be used within investment strategies. 3. Origin of ESG scores: This section explores the origins and methodologies employed by different ESG rating agencies. It specifically introduces five major agencies (MSCI ESG, Refinitiv, Sustainalytics, RobecoSAM, and ISS-oekom), laying the foundation for a later comparison of their approaches. The chapter establishes the various methodologies used by these agencies in assessing companies' ESG performance, providing a context for understanding why different agencies might arrive at different conclusions for the same company. 4. Consistency and comparability of ESG scores: This chapter delves into the empirical findings regarding the consistency and comparability of ESG scores. It examines the key factors contributing to the observed divergence in scores across agencies. This in-depth analysis aims to explain why different agencies produce varying scores, even when evaluating the same company’s sustainability performance. The focus here is on the empirical evidence and the underlying causes of this divergence. 5. Impact of ESG scores: This chapter investigates the impact of ESG scores on companies, focusing on their effects on stock returns, risk profiles, and daily business operations. It explores whether the variation in ESG scores – the divergence discussed earlier – actually affects company performance in measurable ways. The dual examination of both consistent scores and the impacts of score divergence is essential to understanding the broader impact of ESG ratings on the market.

Keywords

ESG scores, sustainability measurement, ESG investing, rating agencies, score divergence, comparability, stock returns, risk, corporate performance, investment decisions, methodological differences, empirical findings.

Frequently asked questions

What is the purpose of this document?

This document is a language preview of a thesis critically reviewing the measurement of corporate sustainability using ESG scores. It provides a comprehensive overview, including the table of contents, objectives, key themes, chapter summaries, and keywords.

What are ESG scores, and why are they important?

ESG stands for Environmental, Social, and Governance. ESG scores are metrics used to assess a company's performance in these three areas, reflecting its sustainability and ethical impact. They are increasingly important for investment decisions as investors prioritize sustainable and responsible investments.

What is the main problem addressed in the thesis?

The thesis investigates the significant divergence observed in ESG scores across different rating agencies. It aims to analyze the impact of this divergence on capital markets and companies' daily operations, and to determine the comparability of these scores and their influence on investment decisions and corporate performance.

What are the main objectives of the thesis?

The main objectives are to investigate the reasons for score divergence among ESG rating agencies, analyze the impact of ESG scores on capital markets and companies, determine the comparability of ESG scores, and explore potential solutions to address the inconsistencies.

What are the key themes explored in the thesis?

The key themes include the ESG concept and its application in investment strategies, methodological differences among ESG rating agencies and the resulting score divergence, the impact of ESG scores on companies' stock returns and risk profiles, the effects of ESG scores on companies' daily business practices, and the overall significance and implications of ESG score inconsistencies.

Which ESG rating agencies are discussed in the thesis?

The thesis introduces five major ESG rating agencies: MSCI ESG, Refinitiv, Sustainalytics, RobecoSAM, and ISS-oekom.

What does the thesis explore regarding the impact of ESG scores on companies?

The thesis investigates the impact of ESG scores on companies' stock returns, risk profiles, and daily business operations. It explores whether the variation in ESG scores affects company performance in measurable ways.

What are the keywords associated with the thesis?

The keywords include ESG scores, sustainability measurement, ESG investing, rating agencies, score divergence, comparability, stock returns, risk, corporate performance, investment decisions, methodological differences, and empirical findings.

What is the structure of the thesis?

The thesis is structured into six chapters: Introduction, ESG and its investment approach, Origin of ESG scores, Consistency and comparability of ESG scores, Impact of ESG scores, and Discussion. Each chapter focuses on a specific aspect of ESG scores and their impact on capital markets and companies.