5th video

Question 1

How big is ESG rating disagreement? .87

Answer 1

Maximum correlation: 0.75 (Refinitiv and Bloomberg)

Minimum correlation: 0.12 (Inrate and Bloomberg)

On average, as we know its around 0.45 correlation

Some sectors/industries might have higher correlation, some lower!!!

Question 2

Ideas regarding tangibility and gross profitability and ESG rating disagreement dispersion?

Answer 2

If company has more tangible assets, it is easier to quantify and calculate the ESG score, thus the ESG rating dispersion will be lower.

With regards to high profitability, they have more resources to manage ESG issues.

First that have no credit rating, they have higher disagreement in social aspect in ESG.

Market capitalisation (proxy for firm size): larger companies have better ESG ratings, so it’s surprising that largest firms have more disagreement.

Question 3

What does credit rating measures?

Answer 3

The risk of default, not honouring its debt obligation.

Question 4

Why do social ratings disagree:? .91

Answer 4

1. Theorisation: no shared view of what it means for a firm to be sustainable (socially responsible)
2. Commensurability: no agreement on metrics to measure sustainability (CSR)

Question 5

Why does ESG rating disagreement arise? .93

Kotsantonis and Serafeim (2019)

Answer 5

1. Inconsistencies in terms of how issuer companies report and disclose data
2. Benchmarking (or how peer groups are defined)
3. ESG data imputation (company doesn’t provide ESG data)

Question 6

Does more disclosure lead to more or less disagreement?

Answer 6

• Christensen, Serafeim, and Sikochi (2022) document that
• greater ESG disclosure leads to greater ESG rating disagreement
• raters disagree nore about ESG outcome metrics than input metrics (policies)
• Conclude that ESG disclosure generally exacerbates ESG rating disagreement rather than resolving it
• Idea: more available information results in more diverse interpretations and thus potentially more disagreement.
• Evaluate only the role of “quantity” not “quality” of disclosure

Question 7

identify three sources of ESG rating divergence .97

Answer 7

Berg, Koelbel, and Rigobon (2022) identify three sources of ESG rating divergence:
* Scope divergence: raters use different categories/attributes
* Measurement divergence: raters measure the same category/attribute differently
* Weight divergence: raters attach different weights to different categories/attributes in the aggregation process

• Most of the differences result from differences in measurement (56%) and scope

Weight divergence seems to play a minor role, explaining only 6% of the overall divergence

Question 8

Differences in opinion good/bad? .98

Answer 8

Differences in opinion are not necessarily bad and not uncommon in finance (or unique to sustainable finance)
* Buy/sell recommendations, EPS forecasts, price target estimates, proxy voting recommendations, portfolio composition of active fund managers, etc.
* However, disagreement resulting from differences in measurement is more problematic
* ESG ratings should not disagree because of differences in underlying data
* Similar sustainability categories should be measured in the same way

Question 9

What can be done about ESG Rating
Disagreement? disclosure mandates

Answer 9

Disclosure mandates also likely to have “real effects” and cause change in corporate and investor behavior
* Mandatory disclosure regulation should focus on prescribing
* Thronization arget of unterally mportant sustainability disclosures (e.B, GHG emissions, de-
* How to calculate these disclosures
* The inclusion of these disclosures in annual reports/official disclosure documents

Question 10

ESG score rewriting?

Answer 10

wtf is that