ESG Ratings and Financial Markets: Evidence, Measurement Noise and Misinterpretations

Karoly Gasteiger ()
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Karoly Gasteiger: University of Pecs

Financial and Economic Review, 2026, vol. 25, issue 2, 159-177

Abstract: This essay examines the measurement limitations that arise when ESG ratings are interpreted as financial information. It argues that composite ESG scores should not be treated as stable risk factors, but rather as information signals shaped by provider-specific methodologies, data sources, disclosure practices and aggregation choices. This essay discusses the separation between disclosure and actual ESG outcomes, the model risk created by rating divergence, and the frequent misinterpretation of the green premium and ESG performance. From a banking perspective, the implication is not to discard ESG information, but rather to use external ESG data with discipline. Without financial materiality, data quality controls, exposure-based assessments and internal governance, ESG cannot serve as a defensible input in financial decision-making.

Keywords: ESG ratings; financial markets; measurement error; rating divergence; information noise; prudential risk management (search for similar items in EconPapers)
JEL-codes: G12 G14 G21 Q56 (search for similar items in EconPapers)
Date: 2026
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