HC 9

Question 1

five steps calculating ESG score

Answer 1

Step 1: ESG category scores
➢ Step 2: Materiality matrix
➢ Step 3: Overall ESG score
calculation and pillar score
➢ Step 4: Controversies scores
calculation
➢ Step 5: ESGC score

Question 2

Issues ESG ratings

Answer 2

• Their focus on past performance and their lack of predictive value for future performance
  ➢Focus on disclosure (past reporting)
• The sometimes-divergent opinions of ESG rating providers for the same company (ESG Rating Disagreement)
• Origin of disagreement:
  ➢Different objective functions
  ➢Conflict of interests ESG Rating Issues 50

Question 3

Gantchev, N., Giannetti, M., & Li, R. (2024). Sustainability or performance? Ratings and fund
managers’ incentives. Journal of Financial Economics

Answer 3

ESG trading: abnormal purchases of high ESG stocks and sales of low ESG stocks relative to the fund’s usual trading strategy → negative associated with fund’s future performance

Question 4

Berg, F., Heeb, F., & Kölbel, J. F. (2022). The economic impact of ESG ratings. Available at SSRN 408854

Answer 4

Changes in the ESG rating (MSCI) seem to influence ownership and pricing.

• When is there divergence?
• Correlations are heterogeneous (i.e., category-, dimension-specific)
• Correlations tend to increase with aggregation (i.e., lower at lower level of topics)
• Is there more divergence at lower levels of ESG?
• Implied correlation for environmental (E) is avg 0.53 (varies 0.23-0.73)
• Implied correlation for S and G are 0.42 and 0.30

Question 5

Chatterji, A. K., Durand, R., Levine, D. I., & Touboul, S. (2016). Do ratings of firms converge?
Implications for managers, investors and strategy researchers. Strategic Management Journal

Answer 5

Divergence due to a lock of consensus on what the term corporate social responsibility means

Question 6

What explains divergence

Answer 6

Scope
Measurement
Weights

Question 7

Christensen, D. M., Serafeim, G., & Sikochi, A. (2022). Why is corporate virtue in the eye of the beholder? The case of ESG ratings. The Accounting Review

Answer 7

More disclosure –> more disagreement between ESG rating agencies –> more volatile returns

Question 8

Evidence on conflict of interests of ESG rating agencies and upward biased ESG ratings

Answer 8

when ESG rating agency at the same time is an index provider (e.g., MSCI)

in the presence of common shareholders between rating agency and rated firm.