Finance

Business

Corporate governance

Biology

Computer science

Philosophy

Economics

Linguistics

Accounting

Scope (computer science)

Confusion

Psychoanalysis

Econometrics

Psychology

Ecology

Programming language

Divergence (linguistics)

Taxonomy (biology)

Review of Finance

This paper investigates the divergence of environmental, social, and governance (ESG) ratings based on data from six prominent ESG rating agencies: Kinder, Lydenberg, and Domini (KLD), Sustainalytics, Moody’s ESG (Vigeo-Eiris), S&amp;P Global (RobecoSAM), Refinitiv (Asset4), and MSCI. We document the rating divergence and map the different methodologies onto a common taxonomy of categories. Using this taxonomy, we decompose the divergence into contributions of scope, measurement, and weight. Measurement contributes 56% of the divergence, scope 38%, and weight 6%. Further analyzing the reasons for measurement divergence, we detect a rater effect where a rater’s overall view of a firm influences the measurement of specific categories. The results call for greater attention to how the data underlying ESG ratings are generated.

Aggregate Confusion: The Divergence of ESG Ratings