Can we rely only on rating agencies?

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Exerpt from: “Aggregate Confusion: The Divergence of ESG Ratings.”
Florian Berg, Julian F. Koelbel, Roberto Rigobon. MIT Sloan &University of Zurich. September 28, 2020.

“Our findings demonstrate that ESG rating divergence is not merely driven by difference in opinions, but also by disagreement about facts. 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. It is legitimate that different raters take different views on these questions. In fact, a variety of opinions may be desirable, given that the users of ESG ratings also have heterogeneous preferences for scope and weights. In particular, different investors will hold different views regarding which categories they deem material, i.e. relevant for the firm’s business success. However, measurement divergence is problematic, if one accepts the view that ESG ratings should ultimately be based on facts that can be ascertained. Currently, different raters do not agree on how well a company performs with regard to Human Rights, product safety, or climate risk management. The reason is that different raters use different indicators and different measurement approaches. As long as there are no consistent standards for ESG disclosure, or data and measurement approaches become more transparent, measurement divergence is likely to remain an important driver of ESG rating divergence.”