Both capture aspects of the attribute labor practices, but they are likely to lead to different assessments. For example, a firm’s labor practices could be evaluated on the basis of workforce turnover, or by the number of labor cases against the firm. Measurement divergence refers to the situation where rating agencies measure the same attribute using different indicators. These papers argue that investors and scholars should reopen the discussion about the concepts and practice of ESG scores to support the sustainable finance community reach their self-imposed objectives with the ESG measurement, Dorfleitner, Halbritter, and Nguyen (2015) and Drempetic, Klein, and Zwergel (2020).īerg, Kölbel, and Rigobon (2019) show the importance of three factors in ratings: scope, measurement and weight and conclude that measurement divergence explains more than 50 percent of the overall divergence. In the US, the elected president Joe Biden has pledged USD2 trillion in climate spending in 2020.Įarlier research papers related to ESG ratings find an evident lack in the convergence of ESG measurement. ![]() In Europe the European Commission’s president Ursula von der Leyen unveiled the European Green Deal in 2019 following the publication of the Union’s Sustainable Finance Strategy in 2018. Their importance has been acknowledged by new European and American political leaders recently. Finally, the paper shows that exchanges in the European Union provide relatively good ESG investment opportunities in international comparison.Įnvironmental, social, and governance (ESG) ratings have been becoming an integral part of financial, business and consumption decisions. In lower segments of the ESG asset universe, investment selection becomes more challenging due to the increasing uncertainty of ratings. We found that the popular best-in-class portfolio selection could be built on ESG scores. The simulations reveal that the uncertainty is primarily related to choice of the ESG rating provider. Monte Carlo simulations are conducted to estimate how the choice of major ESG rating inputs (i) aggregation formula, (ii) weighting scheme and (iii) data provider influence the uncertainty of ratings and thus indirectly the sustainable investment process. We find that ratings from two different rating providers (Sustainalytics and Refinitiv) for the same listed stocks are only weakly correlated, even if the scaling differences of the ratings are adjusted. ![]() ![]() ESG ratings are increasingly important inputs to sustainable investments in the European Union and United States with the phasing-in disclosure regulations. This paper investigates the environmental, social, and governance (ESG) ratings of 20 leading stock exchange indices by analyzing and aggregating ratings of underlying stocks.
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