ESG ratings: relevant information or misleading clue? Evidence from the S&P Global 1200

ABSTRACT

Environmental, social, and corporate governance (ESG) scores are frequently involved in investment-related decision-making, e.g. for red-flagging or to manage risks. The increasing interest in ESG data raises the question about their validity from various sources. Therefore, we explore the consistency and convergent validity of the well recognized ESG data providers. Exploratory factor analysis of S&P Global 1200 index demonstrates considerable uncertainty across extracted latent factors. Further factor analyses show that the consistency and convergent validity across ESG data significantly depend on the industry type and the country of domicile. These findings are supported by confirmatory factor analyses. Thus, the stakeholders are encouraged to incorporate the company sector and domicile aspects into their decisions. Otherwise, naive use of primary ESG scores may provide a misleading clue.

KEYWORDS:

• SRI
• ESG
• sustainable finance
• responsible investment

Acknowledgements

We thank Oleg Deev, Ph.D. and other members of the Institute of Financial Complex Systems for providing background and methodology comments on this paper.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The paper was supported by the specific research project MUNI/A/1031/2019 – Financial markets: Rational and Behavioral factors of investment decision-making and MUNI/A/1147/2020 Behavioral, experimental and sustainable finance; Masarykova Univerzita.