Sense and Nonsense in ESG Ratings

Ingo Walter

Journal of Law, Finance, and Accounting, 2020, vol. 5, issue 2, 273-305

Abstract: Concerns about the future of the natural environment, prevailing social conditions, and governance of private and public institutions inspire today’s ESG movement. This paper proposes a heuristic that can be useful in examining the ESG-scoring issue. We begin with a social control diagnostic covering business activities – one that addresses the interests and actions of various stakeholders in the system. We examine its dynamics in the context of economic, social, and political pressures, including various initiatives to set standards against which business conduct may be calibrated. We evaluate efforts to create metrics that reflect normative improvements in ESG outcomes and performance scoring against them. We assess the industrial organization of the ESG ratings industry and review key empirical studies of ESG-driven investing. We conclude with policy recommendations intended to alleviate existing shortcomings in ESG ratings and improve their role in capital allocation and corporate governance.

Keywords: Environmental degradation; social impact; sustainability; corporate governance; corporate ratings; target funds; investment fund performance (search for similar items in EconPapers)
JEL-codes: B55 D18 D30 D62 D74 F53 H89 I30 K29 K38 K42 K49 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:now:jnllfa:108.00000049

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