Aggregate confusion: the divergence of ESG ratings

This paper investigates the divergence of environmental, social, and governance (ESG) ratings. Based on data from six prominent rating agencies, the authors decompose the divergence into three sources: different scope of categories, different measurement of categories, and different weights of categories.

Berg, Florian and Kölbel, Julian and Rigobon, Roberto, Aggregate Confusion: The Divergence of ESG Ratings (May 17, 2020)

Adhering to stringent environmental, social, and governance (ESG) practices is increasingly seen as good for the world and good for business, with progressively more investors looking to boost their returns and push companies to become better corporate citizens. The majority of ESG-minded investors currently use instruments like exchange-traded funds (ETFs) that track sustainable indices. These sustainable indices in turn rely on rating agencies to grade companies on their ESG performance.

ESG ratings first emerged in the 1980s as a way for investors to screen companies not purely on financial characteristics but also on characteristics related to social and environmental performance. This timely paper from Berg et al investigates the current divergence of ESG ratings, using data from six prominent rating agencies (KLD, Sustainalytics, Vigeo Eiris, RobecoSAM, Asset4 and MSCI). The authors decompose the divergence into three sources: different scope of categories, different measurement of categories, and different weights of categories. They conclude that scope and measurement divergence are the main drivers, while weights divergence is less important. In addition, this study indicates that a rater’s overall view of a firm influences its assessment of specific categories.

The authors argue that these discrepancies and divergences are significant because ESG ratings increasingly influence financial decisions, with potentially far-reaching effects on asset prices and corporate policies.


For this study, the authors approached each provider and requested access to not only the ratings, but also the underlying indicators, as well as documentation about the aggregation rules and measurement protocols of the indicators. They discovered that measurement divergence is the most important reason why ESG ratings diverge, i.e. different raters measure the performance of the same firm in the same category differently. Human Rights and Product Safety are categories for which such measurement disagreement is particularly pronounced.

While it may not be surprising that six competitors differ in their approach, it does means that the information that decision-makers receive from ESG rating agencies is relatively noisy. The authors suggest that three major consequences follow: First, ESG performance is less likely to be reflected in corporate stock and bond prices, as investors face a challenge when trying to identify outperformers and laggards. Investor tastes can only impact asset prices, from coal to coffee, when a large enough fraction of the market holds and implements a uniform nonfinancial preference. Therefore, even if a large fraction of investors have a preference for ESG performance, the divergence of the ratings disperses the effect of these preferences on asset prices.

Second, the authors argue that this divergence hampers the ambition of companies to improve their ESG performance, because they receive mixed signals from rating agencies about which actions are expected and will be valued by the market. Third, the divergence of ratings poses a challenge for empirical research, as using one rating agency rather than another could alter a study’s results and conclusions. Taken together, the ambiguity around ESG ratings represents a challenge for decision-makers trying to contribute to an environmentally sustainable and socially just economy.


This study shows that ESG rating divergence is not merely driven by differences in opinions, but also by disagreements about underlying data. Scope and weights divergence both represent disagreement about what the relevant categories of ESG performance are, and how important they are relative to each other.

This situation presents a challenge for companies, because improving scores with one rating provider will not necessarily result in improved scores at another. Thus, ESG ratings do not, currently, play as important a role as they could in guiding companies toward improvement. To change this situation, the authors suggest that companies should work with rating agencies to establish open and transparent disclosure standards and ensure that the data that they themselves disclose is publicly accessible.

For investors, averaging indicators from different providers is a relatively easy way to eliminate measurement divergence, however, this approach may be problematic because the discrepancies are not randomly distributed. Alternatively, investors might rely on one rating agency, after convincing themselves that scope, measurement, and weights are aligned with their objectives

For rating agencies, the authors call for greater transparency. They suggest that ESG rating agencies should clearly communicate their definition of ESG performance in terms of scope of attributes and aggregation rule. Second, rating agencies should become much more transparent about their measurement practices and methodologies. This would allow investors and other stakeholders, such as rated firms, NGOs, and academics, to evaluate and cross-check the agencies’ measurements.

Finally, rating agencies should seek to understand what drives the rater effect, in order to avoid potential biases. By taking these steps, rated firms would have clearer signals about what is expected of them, and investors could determine more precisely whether ESG ratings are aligned with their objectives.