Overall, the research team found that measurement differences accounted for 50.1% of the total differences between ESG ratings, with weight differences accounting for 13.2% of differences and differences in mimics being responsible for 36.7% on average. Together, differences in weight and size can be defined as such that a credit rating agency defines sustainability. We document the multiple effects of disagreement on equity returns and hence on the cost of capital for business management and responsible investors. On the other hand, investors are rarely informed of the actual performance of companies in terms of ESG, because there is little mandatory, standardized, verified ESG data, and among all – comparable – ESG data. Thus, in the absence of major scandals such as Volkswagen`s dieselgate or the BP oil spill, market participants cannot observe whether a company has a good or bad ESG policy. Similarly, if there was a clearly correct ESG rating, it would be included in the market – so you would not be able to trade money. The book discusses several sources of ESG information that are not taken into account by the market, as the market is having difficulty assessing intangible factors (such as ESG) that are difficult to measure. This means that all investors – not just socially responsible investors – should take ESG factors seriously. Although they are sometimes considered “non-financial” factors, emission data show that they often become financial in the long term. In Figure 1, we report on the average, minimal and maximum pair correlations. While the average pair correlation for the GSS as a whole and the environmental assessment between suppliers is 0.46 and 0.43, we are talking about smaller figures – that`s more disagreement – for the ratings of social democracy and governance, namely 0.33 and 0.19. We analyze the ESG evaluation criteria used by leading agencies and show that the definition of characteristics, (ii) attributes and (iii) standards for the definition of E, S and G components lacks commonalities. We provide evidence that the heterogeneity of the rating criteria may lead agencies to have conflicting views on the same companies rated and that the agreement between these suppliers is essentially weak.
These alternative definitions of the GSE also concern sustainable investments that lead to the identification of different investment universes and, therefore, the creation of different benchmarks.