The pitfalls of (non-definitive) Environmental, Social, and Governance scoring methodology

Özge Sahin, Karoline Bax, Sandra Paterlini and Claudia Czado

Global Finance Journal, 2023, vol. 56, issue C

Abstract: Evaluating companies' sustainability performance embraces environmental, social, and governance (ESG) activities. Data providers assign companies ESG scores as a quantitative measure based on available information. Refinitiv (previously ASSET4) is a key data provider whose scores are used extensively by researchers and companies; however, their ESG scoring methodology allows the scores from the five most recent years to change post-publication without any announcements. Such ESG scores are called non-definitive. Then, ESG research findings and companies' sustainability performance using the ESG data from the same data provider might be inconsistent. Optimization and exploratory data mining approaches show that it is possible to change ESG scores to exhibit stronger risk dependence. We discuss how the initial disclosure of ESG information and updating the published ESG information alter the way ESG scores are computed in a given industry group, impacting ESG research findings significantly. Moreover, the initial disclosure of ESG information and an update in the published ESG information might allow some companies to appear more sustainable, even though nothing has changed. Finally, our work indicates the criticality that should be addressed to improve comparability within research studies and companies' sustainability performance relying on data from the same ESG providers.

Keywords: Corporate social responsibility; Data mining; Data quality; ESG scores; Risk; Sustainability performance (search for similar items in EconPapers)
JEL-codes: G24 G30 G32 (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:56:y:2023:i:c:s1044028322000825

DOI: 10.1016/j.gfj.2022.100780

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