ESG rating agencies hold sway in financial markets, yet their ratings often differ, creating challenges.
This study, based on six leading agencies, reveals correlations between their ESG ratings range from 38% to 71%. The divergence, though not extreme, complicates distinguishing ESG leaders from average performers.
To explain this, we use a dataset categorizing indicators into a common taxonomy of 64 attributes. Divergence stems from scope (38%), measurement (56%), and weights (6%).
A ”rater effect” suggests structural reasons behind measurement divergence.
While ESG rating divergence doesn’t negate its value, it emphasizes complexity. Attention to underlying data is essential, and ESG ratings must be tailored for each application. Investors can use this methodology to reconcile differing ratings. Regulators could harmonize ESG disclosure and establish an ESG category taxonomy, promoting reliable data and rating comparisons within a common framework.