02 March 2020

ECGI: ESG rating disagreement and stock returns

ESG ratings are often based on non-standardized information and data vendors use different rating methodologies, ratings can diverge substantially. So far, it is not well understood why ESG ratings diverge and whether, or not, there are financial implications from such divergence.

In this paper, authors aim to fill this gap by

1. quantifying the magnitude of disagreement between ESG ratings from six well-known ESG ratings providers,
2. identifying whether disagreement is higher for certain types of firms, and
3. examining whether ESG rating disagreement affects future stock returns.

Authors use ESG ratings from six prominent ESG rating providers, namely Asset4 (now Refinitiv ESG), Sustainalytics, Inrate, Bloomberg, MSCI KLD, and MSCI IVA.

This paper is the first to document the multi-faceted implications of ESG ratings disagreement on stock returns and thus on firms’ costs of capital. The analysis also has important implications for responsible investors who rely on one or a couple of ESG rating sources and ignore the impact of ESG ratings disagreement on future stock prices and thus do not factor in the potential pricing implications of ESG rating disagreement on the performance of responsible investment strategies.

Full paper on ECGI

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