The paper “Aggregate Confusion: The Divergence of ESG Rating” has been published in the Oxford Academic Review of Finance! Congratulations to authors Florian Berg, Julian Kölbel, and Roberto Rigobon. Julian, Head of Research at the Center for Sustainable Finance and Private Wealth in Zurich, summarizes their key findings below:

The paper investigates how much and why ESG ratings diverge. We find that correlations are at 0.54, as you can see in the key figure here. It shows that while ESG ratings rarely provide diametrically opposing assessments, the dispersion makes it difficult to tell firms that are ESG leaders from average performers.

We also find that 56% of the divergence is due to different ways of measuring ESG attributes (such as: how do I measure employee relations?). This highlights that anyone using ESG data should scrutinize how it is measured. We also find that 38% is due to scope (which categories are part of ESG) and 6% to weights (what is the relative importance of carbon emissions to employee relations).

As the discourse about ESG is intensifying, my hope is that the paper encourages a nuanced debate. There are good reasons to disagree on ESG (because we have different idea of what we want to measure), and problematic reasons (because we disagree about facts like the amount of a firm’s emissions).

I am convinced that many people deeply care about sustainability and fairness. For that reason, ESG rating agencies have an important role to play. And criticism on how ESG is measured also has a role to play, because it is essential to get these things right and base decisions on reliable and transparent data.