ESG ratings: Disagreement across providers and effects on stock returns

Abstract

This paper examines the ESG rating assigned by two providers, Refinitiv and Bloomberg, to companies listed in Europe and the United States in the period 2010-2020. The objective is twofold. Firstly, we document the path of the ESG ratings over time and the divergence of opinions across providers. Secondly, we investigate whether the ESG dimension affects stock returns. The ESG scores have increased significantly over time, both in Europe and the United States. Companies with higher ESG scores have the following characteristics: larger size, lower credit risk, and lower equity returns. The ESG dimension does not affect stock returns, once risk factors have been taken into account. The divergence of opinions across rating providers is stable in Europe and increasing in the US. As for the individual components (E, S and G), in both markets we observe a wide and constant divergence of opinions for governance as well as a growing divergence over time for the social component. A wide divergence of opinions on the ESG score does not favor the correct pricing of the ESG risks and weakens the link between investors' ESG preferences and the performance of stocks with better ESG metrics. However, the lack of agreement in the opinions of ESG rating providers should not be considered only negatively as differences of opinion can actually enrich the information set, stimulating further analysis by investors and avoiding rating over-reliance (which proved to be a key issue in the 2007-2009 financial crisis).

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