ESG metrics prove inconsistent

Financial Times highlights issues with ESG measures sold by ratings agencies and used by investors

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ESG (environmental, social and governance) ratings are inconsistent, according to research co-authored by London Business School (LBS) Professor of Finance Anna Pavlova and academics at MIT Sloan School of Management, and featured in the Financial Times (FT).

MIT Sloan research fellow and paper co-author Florian Berg told the FT ESG ratings lacked transparency.

“They might give you the name of the indicators they use and, perhaps, the weights of those indicators, but I don’t know any that clearly explain how these indicators are created or what data go into them,” he said.

The study was featured following comments by auto manufacturer Tesla questioning the reliability of ESG measures. It examined ESG scores from eight ratings agencies to develop a model to allow a clear relationship between stock returns and ESG performance to be established.

Anna Pavlova is Academic Director of the AQR Asset Management Institute at LBS.