ESG ratings: an industry in need of a major overhaul

Ventura Charlin, Arturo Cifuentes and Jorge Alfaro

Journal of Sustainable Finance & Investment, 2024, vol. 14, issue 4, 1037-1055

Abstract: The impetus for adopting ESG-sensitive investment policies has increased steadily since 2006, when the United Nations outlined its Principles of Responsible Investment (PRI). Recently, a new industry aimed at helping investors to make sound ESG-driven decisions has flourished: ESG rating agencies. We investigated the ratings provided by four leading rating agencies (ISS, MSCI, S&P, and Sustainalytics) to the companies in the S&P500 index. Using measurement theory techniques, we concluded that ESG ratings currently exhibit an abysmally low level of reliability (18.3%) and agreement (5.4%). This situation differs sharply not only with the levels of reliability and agreement found in credit ratings but also with the reliability and agreement found in areas where subjectivity plays an important role, for example, wine ratings. These findings challenge the claim that ESG ratings can be helpful to make investment decisions, as they suggest that the ESG ratings industry as a whole is in much disarray.

Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/20430795.2022.2113358 (text/html)
Access to full text is restricted to subscribers.

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:taf:jsustf:v:14:y:2024:i:4:p:1037-1055

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/TSFI20

DOI: 10.1080/20430795.2022.2113358

Access Statistics for this article

Journal of Sustainable Finance & Investment is currently edited by Dr Matthew Haigh

More articles in Journal of Sustainable Finance & Investment from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().