Alternative ESG Ratings: How Technological Innovation Is Reshaping Sustainable Investment

Arthur Hughes, Michael A. Urban and Dariusz Wójcik
Additional contact information
Arthur Hughes: School of Geography and the Environment, Oxford University Centre for the Environment, University of Oxford, Oxford OX1 3QY, UK
Michael A. Urban: School of Geography and the Environment, Oxford University Centre for the Environment, University of Oxford, Oxford OX1 3QY, UK
Dariusz Wójcik: School of Geography and the Environment, Oxford University Centre for the Environment, University of Oxford, Oxford OX1 3QY, UK

Sustainability, 2021, vol. 13, issue 6, 1-23

Abstract: Environmental, Social and Governance (ESG) rating agencies have been instrumental in mainstreaming sustainability in the investment industry. Traditionally, they have relied on company disclosure and human analysis to produce their ratings. More recently however, technological innovation in data scraping and Artificial Intelligence (AI) have undercut the traditional approach. Tech-driven Alternative ESG ratings are becoming increasingly influential yet remain critically underexplored in sustainable finance scholarship. Grounded within financial geography and using mixed methods, this paper fills this gap by comparing a set of Traditional ratings, sourced from MSCI ESG, with an Alternative AI-based set of ESG ratings sourced from Truvalue Labs. Our results expand upon recent research on ESG ratings by shedding new light on low commensurability between Traditional and Alternative ESG ratings. Specifically, we show that differences in ratings are driven by four main factors: differences in ESG theorisation based on key issue selection, differences in data sources analysed, differences in weighting structures for rating aggregation, and finally differences in controversy analysis. Our findings are contextualised using participatory observations collected during fieldwork at a leading asset manager in the City of London. Overall, we show that the advantages of Alternative ESG ratings include higher levels of standardisation, a transparent ‘outside-in’ perspective on ratings, a more democratic aggregation process, and rigorous real-time analytics. We argue that these characteristics reflect a geographic reconfiguration of ESG rating construction, expanding from financial agglomerations to technological and digital spaces of innovation. While Alternative ESG ratings make major promises on how technology can reform sustainable investing, we recognise that risks remain.

Keywords: environmental, social and governance (ESG); financial geography; sustainable investment; agglomerations; artificial intelligence (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
https://www.mdpi.com/2071-1050/13/6/3551/pdf (application/pdf)
https://www.mdpi.com/2071-1050/13/6/3551/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jsusta:v:13:y:2021:i:6:p:3551-:d:522385

Access Statistics for this article

Sustainability is currently edited by Ms. Alexandra Wu

More articles in Sustainability from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().