Aggregate ESG confusion
A new paper highlights just how tricky it is to come up with an objective, rigorous ESG investing framework.
A new paper highlights just how tricky it is to come up with an objective, rigorous ESG investing framework.
A further market distortion arises from what academics Florian Berg, Julian Kölbel and Roberto Rigobon call “aggregate confusion."
A lack of reliability, comparability and transparency in ESG measurement produces "Aggregate Confusion."
"Investors need to dive deep into the details of the different methodologies of ESG raters when the same company has different ratings."
Differences in measurement and scope contribute to 56% and 38% of the divergencies across scores, respectively, and weights contribute 6%.
"Diversifying the source of ESG ratings is very helpful. Having more than one source ... [helps] you get rid of some noise."
"ESG ratings, though flawed, are currently still the best option to measure the ethical behaviour of firms."
"As the business of rating has grown, and technology brings disruption, regulators on both sides of the Atlantic are preparing new rules."
For research scientist Florian Berg the controversies around ESG stem from a lack of clarity about what its goals are.
Different environmental, social and governance (ESG) ratings can paint radically different pictures of the same company.