This Bachelor’s thesis critically examines ESG (Environmental, Social, Governance) scores as tools for measuring corporate sustainability. As sustainable investing gains momentum, institutional and retail investors increasingly rely on ESG ratings from third-party providers. However, these scores often diverge significantly across agencies, raising concerns about transparency, comparability, and their usefulness in capital allocation.
The thesis analyzes and compares the methodologies of five major ESG rating agencies—MSCI, Refinitiv, Sustainalytics, RobecoSAM, and ISS-oekom. The question is how this can occur, since the same company cannot have different ESG performances. To what extent are ESG scores of different agencies comparable? Is there a certain ESG score investors can rely on? Do ESG scores materially impact risk and return factors which are mainly considered by investors? How do they affect companies’ ESG performance and daily business? The objectives of this thesis are derived from these questions. Above all, it should be clarified why ESG scores show such a divergence. It is also important whether the ESG scores impact capital markets or the companies themselves because an impact would increase the overall significance of ESG scores. To answer these objectives, ESG as a sustainability concept and its associated investment approach will be explained in more detail to provide a baseline. Afterwards, the origin of ESG scores is described.
Table of Contents
1. Introduction
2. ESG and its investment approach
3. Origin of ESG scores
3.1 Agencies and their methodologies
3.1.1 MSCI ESG
3.1.2 Refinitiv
3.1.3 Sustainalytics
3.1.4 RobecoSAM
3.1.5 ISS-oekom
3.2 Comparison of the agencies
4. Consistency and comparability of ESG scores
4.1 Empirical findings and main drivers of ESG score divergence
4.2 Empirical findings and issues on ESG score comparability
5. Impact of ESG scores
5.1 Effects on companies’ ESG stock return and risk
5.1.1 ESG scores
5.1.2 ESG score divergence
5.2 Effects on companies’ daily business
6. Discussion
7. Conclusion
Objectives and Core Topics
This thesis examines the measurement of sustainability via ESG scores, focusing on the significant divergence between different rating agencies. The primary objective is to clarify why such discrepancies occur, analyze their impact on capital markets and company performance, and determine whether these scores offer the consistency and reliability that investors require for sustainable investment decisions.
- Methodologies of leading ESG rating agencies (MSCI, Refinitiv, Sustainalytics, RobecoSAM, ISS-oekom).
- Main drivers of ESG score divergence (scope, measurement, and weighting methodologies).
- Impact of ESG score changes and divergence on stock returns and risk factors.
- Corporate responses to ESG assessments and their effect on daily business operations.
Excerpt from the Book
3.1.1 MSCI ESG
MSCI, which is based in New York, started focusing on ESG back in 1990 when they launched its first index that considered social responsibility. Over the years, MSCI has established itself as a permanent player in the business of ESG scores. The agency uses data from company disclosures, media and specialized datasets. According to MSCI ESG Research LLC (2023a, p. 4) the agency uses a scale consisting of seven points from CCC (worst) to AAA (best) for the determination of their scores. The calculation of an ESG score is divided into its three E, S and G dimensions. Out of the 33 key issues, two to seven issues are evaluated for each the Environment and Social pillar and included in the score. All key issues are rated from 0-10, focusing on the exposure in terms of risk or opportunities (Key Issue Exposure Score) and the ability of the company to manage both (Key Issue Management Score) (p. 8).
Possible environmental risks are associated with climate change (e.g. Carbon Emissions) or pollution & waste (e.g. electronic waste), whereas the opportunities are seen in clean tech or green building (p. 6). In this context, social risks relating to a company’s human capital (e.g. health & safety) or product liability (e.g. chemical safety) are assessed and opportunities arising from access to finance or health care are included in the score (p. 6). The governance pillar is also assessed from 0-10, starting with a perfect score of 10 and deducting a corresponding number of points depending on the risk exposure of corporate governance issues. The company’s governance is assessed using indicators such as its board or accounting. Added to this is corporate behavior which is measured by business ethics and tax transparency (p. 6). Once all three ESG pillars have been evaluated according to their criteria, a preliminary score is calculated (Weighted Average Key Issue Score) (p. 7). As the name suggests, the individual key issues are included in the score with different weights. An environmental and social key issue accounts for 5% to 30% of the final ESG score, depending on the industry under consideration (p. 15). The governance pillar is assigned a general weight for the entire dimension which also depends on the industry where the company is located in.
Summary of Chapters
1. Introduction: Outlines the growing importance of ESG in society and capital markets, while highlighting the research problem of significant score divergence between agencies.
2. ESG and its investment approach: Defines the core pillars of ESG and discusses how the concept is integrated into investment strategies by restricted versus unrestricted investors.
3. Origin of ESG scores: Details the methodologies of five major agencies and compares their approaches regarding data sources, weighting, and update frequencies.
4. Consistency and comparability of ESG scores: Analyzes the empirical reasons for score divergence, attributing it primarily to differences in scope, measurement indicators, and weighting, while addressing issues of comparability.
5. Impact of ESG scores: Investigates the economic consequences of ESG scores, specifically their correlation with stock returns, idiosyncratic risk, cost of capital, and corporate management practices.
6. Discussion: Synthesizes the findings and proposes potential solutions for standardization and harmonizing ESG evaluations to overcome current limitations.
7. Conclusion: Summarizes the key insights and reaffirms the necessity for more consistent ESG measurement to support sustainable and informed investment decisions.
Keywords
ESG scores, sustainability measurement, ESG divergence, rating agencies, capital markets, stock returns, idiosyncratic risk, corporate sustainability, ESG investing, weighting, ESG reporting, financial performance, transparency, standardization, cost of capital.
Frequently Asked Questions
What is the core focus of this thesis?
The thesis critically reviews the measurement of corporate sustainability through ESG scores and investigates the reasons for, and impacts of, the significant score divergence observed across various rating agencies.
What are the primary themes discussed?
The core themes include the diverse methodologies of ESG rating agencies, the factors driving score divergence, the impact of these scores on stock market performance and risk, and how companies respond to ESG assessments.
What is the main objective of the research?
The primary goal is to understand why ESG scores for the same company often differ, and to determine whether these scores reliably influence capital markets or corporate business practices.
Which methodology is employed in this thesis?
The work utilizes a literature-based comparative analysis, synthesizing recent academic studies to evaluate agency methodologies and empirical data regarding score divergence and market impacts.
What is covered in the main section of the paper?
The main section details the methodologies of five key agencies, empirically examines the drivers of score divergence, and assesses the effects of these scores on stock returns, risk, and internal corporate decision-making.
Which keywords best characterize the work?
The most important keywords are ESG scores, sustainability measurement, score divergence, rating agencies, stock market impact, and corporate responsibility.
What is the "rater effect" mentioned in the study?
The rater effect describes a phenomenon where analysts tend to evaluate a category similarly to a previous one, introducing subjective bias into the scoring process when hard data is unavailable.
How does ESG score divergence affect investors?
Divergence introduces uncertainty, which is often interpreted as increased risk, leading investors to demand higher stock returns as a risk premium. It also makes direct comparison of corporate sustainability performance difficult.
Do companies change their behavior due to ESG scores?
The study finds that while many companies respond, they often focus on "passive conformity" by improving their ESG reporting rather than fundamentally enhancing their underlying sustainability performance, except for the governance pillar which shows significant responses.
Does a high ESG score lead to lower company risk?
Yes, the research indicates that companies with external ESG scores generally benefit from lower idiosyncratic risk, which provides a strong argument for risk-averse investors to prefer ESG-rated companies.
- Arbeit zitieren
- Christoph Burmeister (Autor:in), 2023, ESG Scores. A Critical Review of Sustainability Measurement, München, GRIN Verlag, https://www.grin.com/document/1600410
