Aggregate Confusion: The Divergence of ESG Ratings - FEEM

1 ProblemMethodologyEmpiricalSummaryAggreg ate Confusion: The Divergence of ESG RatingsFlorian Berg, Julian F. Koelbel, Roberto RigobonFEEN Webinar Series,October 7th, 2020 Florian Berg, Julian F. Koelbel, Roberto RigobonAggregate confusion : , Scope, and WeightsImplementation3 EmpiricalDataDiscrepancyTaxonomyEstimati onDecompositionRater Effect4 SummaryFlorian Berg, Julian F. Koelbel, Roberto RigobonAggregate confusion : , Scope, and WeightsImplementation3 EmpiricalDataDiscrepancyTaxonomyEstimati onDecompositionRater Effect4 SummaryFlorian Berg, Julian F. Koelbel, Roberto RigobonAggregate confusion : uence of ESG RatingsESG1 Rating Agencies are becoming in uential institutionsInvestors with USD 80 trillions "integrate" ESG informationBig players are buying ESG rating agenciesRegulatory endorsement of ESG Ratings possible1 ESG = Environmental, Social, Governance. Sustainability Ratings orCorporate Social Responsibility (CSR) RatingsFlorian Berg, Julian F.

2 Koelbel, Roberto RigobonAggregate confusion : : Which companies are "good"? Pricing implications?Companies: What is expected of us?Academics: How to work with ESG Ratings empirically?Florian Berg, Julian F. Koelbel, Roberto RigobonAggregate confusion : Elements of ESG RatingsScope: which attributes are included?Measurement: how are these attributes measured?Weights: how are indicators aggregated into one score?Florian Berg, Julian F. Koelbel, Roberto RigobonAggregate confusion : Sustainability Ratings diverge?Three sources of Divergence : Ratings agencies rely on a different set of Divergence :Rating agencies take different views on the relative importance Divergence :Rating agencies measure the same attribute using different on DivergenceMeasurement explains 53% of the variationScope 44% and Weights 3%Factors behind the measurement disagreement?Rater Effect accounts for one fth of the variationFlorian Berg, Julian F.

3 Koelbel, Roberto RigobonAggregate confusion : , Scope, and WeightsImplementationOutline1 Problem2 MethodologyMeasurement, Scope, and WeightsImplementation3 EmpiricalDataDiscrepancyTaxonomyEstimati onDecompositionRater Effect4 SummaryFlorian Berg, Julian F. Koelbel, Roberto RigobonAggregate confusion : DisagreementA1A2A3A4 AnI1,1I1,2I1,nI2,1I2,2I2,nRating Agency 1 Rating Agency DisagreementA1A2A3A4 AnI1,1I1,2I1,3I1,nI2,1I2,2I2,3I2,nRating Agency 1 Rating Agency DisagreementA1A2A3A4 AnI1,1I1,2I1,3I1,nR1I2,1I2,2I2,3I2,nR2 Rating Agency 1 Rating Agency , Scope, and WeightsImplementationComparing raw dataPractically Impossible to nd two rating agencies that measure theexact same attribute for the same rm (Only a dozen pairs).We need to match raw data otherwiseScopediscrepancies wouldexplain all the Divergence . We created a Taxonomy for Berg, Julian F. Koelbel, Roberto RigobonAggregate confusion : DivergenceDecomposition of Discrepancies: Without CategoriesA1A2A3A4 AnIfk,1 Ifk,2 Ifk,3 Ifk,4 Ifk, of Discrepancies: With CategoriesA1A2A3A4 AnIfk,1 Ifk,2 Ifk,3 Ifk,4 Ifk,nRfkCfk,1 Cfk,2 Cfk, EffectOutline1 Problem2 MethodologyMeasurement, Scope, and WeightsImplementation3 EmpiricalDataDiscrepancyTaxonomyEstimati onDecompositionRater Effect4 SummaryFlorian Berg, Julian F.

4 Koelbel, Roberto RigobonAggregate confusion : EffectDataRating Agency Abbrv. OwnerIndicatorsKLDKLMSCI78 Sustainalytics SAMorningstar 163 Vigeo EirisVIMoody's38 RobecoSAMRSS&P Global 80 Asset4A4Re nitiv282 MSCIMSMSCI68 ESG and indicator level dataBaseline year 2014 (robustness check 2017)924 common rms between ratersFlorian Berg, Julian F. Koelbel, Roberto RigobonAggregate confusion : EffectMean Absolute Deviation from the MedianProblem with CorrelationsCorrelations at rating agency level hides rm heterogeneityIs the low correlation due to a small set of rms?Median Absolute DeviationFor each rm computeMADf= k|Rfk median(Rf.)|whereRfkis the score of rmfand rating the top 100 and bottom 100 rms as measured by their meanmedian absolute Berg, Julian F. Koelbel, Roberto RigobonAggregate confusion : DivergenceComparison of rms' normalized Parts CompanyChina Resources Land CorporationTurkiye Halk Bankasi CorporationIntuitive Surgical, Wohnen AGMediaTek Industries Auto Parts CorporationSonic Healthcare LimitedSampo OyjHelmerich & Payne, FalabellaCommercial International Bank (Egypt) Half International Mexican Grill, Brands Home & Security, Organisation of Football Prognostics , Realty CorporationHealth Care REIT, International & Co.

5 , AGVentas, Steel & Sumitomo Metal CorporationCardinal Health, + Nagel International AGFranklin Resources Group plcChallenger LimitedLuxottica Group SpADistribuidora Internacional de , Mail and General Trust plcMitsubishi Tanabe Pharma CorporationHTC CorporationKobe Steel Research Institute, s CorporationToyota Industries CorporationApple Co., Santander ChileEdenred SAKuraray Co. Morris International, Pharmaceutical Company LimitedChugai Pharmaceutical Co. Holdings Company, LimitedSika AGTrelleborg ABResona Holdings, Handelsbanken AB (publ)Mitsubishi Heavy Industries Systemes SASysmex House Industry Co. Denko CorporationMorgan StanleyIMI plcAstellas Pharma, Match ABBrambles LimitedDaikin Industries Airways LimitedNikon CorporationSGS SARolls Royce Holdings plcBouygues SABCE Mills, CorporationBaker Hughes IncorporatedFord Motor SACA Technologies, Service Enterprise Group Business Machines CorporationKesko OyjNewmont Mining CorporationColgate Palmolive Corporation LimitedXcel Energy Securities Group plcSwedbank AB (publ)

6 Kering SAAmerican Water Works Company, Tobacco Group plcAccor Soup CompanyKingfisher plcCisco Systems, CorporationDexus Property Group 2 1012 Normalized RatingRating_AgencySustainalyticsRobecoS AMA sset4 of rms' normalized Parts CompanyChina Resources Land CorporationTurkiye Halk Bankasi CorporationIntuitive Surgical, Wohnen AGMediaTek Industries Auto Parts CorporationSonic Healthcare LimitedSampo OyjHelmerich & Payne, FalabellaCommercial International Bank (Egypt) Half International Mexican Grill, Brands Home & Security, Organisation of Football Prognostics , Realty CorporationHealth Care REIT, International & Co., AGVentas, Steel & Sumitomo Metal CorporationCardinal Health, + Nagel International AGFranklin Resources Group plcChallenger LimitedLuxottica Group SpADistribuidora Internacional de , Mail and General Trust plcMitsubishi Tanabe Pharma CorporationHTC CorporationKobe Steel Research Institute, s CorporationToyota Industries CorporationApple Co.

7 , Santander ChileEdenred SAKuraray Co. Morris International, Pharmaceutical Company LimitedChugai Pharmaceutical Co. Holdings Company, LimitedSika AGTrelleborg ABResona Holdings, Handelsbanken AB (publ)Mitsubishi Heavy Industries Systemes SASysmex House Industry Co. Denko CorporationMorgan StanleyIMI plcAstellas Pharma, Match ABBrambles LimitedDaikin Industries Airways LimitedNikon CorporationSGS SARolls Royce Holdings plcBouygues SABCE Mills, CorporationBaker Hughes IncorporatedFord Motor SACA Technologies, Service Enterprise Group Business Machines CorporationKesko OyjNewmont Mining CorporationColgate Palmolive Corporation LimitedXcel Energy Securities Group plcSwedbank AB (publ)Kering SAAmerican Water Works Company, Tobacco Group plcAccor Soup CompanyKingfisher plcCisco Systems, CorporationDexus Property Group 2 1012 Normalized RatingRating_AgencySustainalyticsRobecoS AMA sset4 MSCI/KLDV igeoToho Co.

8 Shin Rubber Industries Co. Electric Railway Co., CorporationTokyu CorporationMarui Group Co., Gas Co. CorporationTencent Holdings Property and Casualty Co. Electric Co. Exchange Group, Automobil Holding SEWest Japan Railway CompanyGrupo de Inversiones Suramericana Seikan Group Holdings, Foods, Mitsui Financial Group, Agri Resources LtdWilliam Hill plcKT&G CorporationHoneywell International Securities Co. Digital CorporationItausa Investimentos Itau Reddy s Laboratories Pacific LimitedThe AES CorporationThe Goodyear Tire & Rubber CompanyGoogle Optronics Real Estate Investment TrustHyundai Engineering & Construction Co., Research CorporationSSE plcLarsen & Toubro LimitedAisin Seiki Co., Holdings CorporationPfizer SEJuniper Networks, Mexicano, de Laboratories NVComcast CorporationIluka Resources Energy Financial Holding Co., plcSamsung Electro Mechanics Co.

9 Motor Co., Mobis Co., Resources, Technologies AGSamsung Electronics Co. plcOracle CorporationHitachi Chemical Co. Electronics Electric Power Co., Micro Devices, CorporationPower Assets Holdings LimitedThe Royal Bank of Scotland Group plcCEMEX, de Telegraph and Telephone CorporationITV plcKone OyjH & M Hennes & Mauritz AB (publ)Taiwan Semiconductor Manufacturing Company LimitedAmadeus IT Holding SALite On Technology Holdings plcMahindra & Mahindra National Railway CompanyExelon CorporationPetrofac LimitedOutotec OyjInternational Paper CompanyNTT DOCOMO, Communications Trust CorporationVivendi AnonymeBanco Santander, Materials, CorporationCRH plcGlaxoSmithKline plcUmicore CorporationPraxair, AG & Co. KGaABT Group plcSTMicroelectronics NVL Oreal SA 3 2 10123 Normalized RatingRating_AgencySustainalyticsRobecoS AMA sset4 EffectMean Median Absolute DeviationsVery large heterogeneity at the rm levelFor the strong agreement set (100 smallest MAD's) correlation ofmeasures across rating agencies is 90%For the low agreement set (100 smallest MAD's) correlation ofmeasures across rating agencies is 32%Florian Berg, Julian F.

10 Koelbel, Roberto RigobonAggregate confusion : EffectComparing RankingsFinancial Institutions care more about ranking than Scores might be uncorrelated, but rankings might be rms among the top and bottom 20 percent (164 rms)Common among Top quantileCommon among Bottom quantileAkzo Nobel NVAdvance Auto Parts & New Zealand Banking Group Limited Affiliated Managers Group plcAmerica Movil de AGAmphenol CorporationBNP Paribas SABerkshire Hathaway Soup CompanyCencosud Bank of AustraliaChina Development Financial Holding CorporationDexus Property GroupChina Resources Land plcCP ALL Public Company LimitedEDP-Energias de Portugal, Saison Co. CompanyDeutsche Wohnen AGImperial Tobacco Group plcExpedia de Diseno Textil SAGenuine Parts CompanyKing sher plcGrupo Financiero Inbursa, de Philips International Group Company LimitedMondi plcIntuitive Surgical, Australia Bank LimitedJapan Real Estate Investment CorporationNokia CorporationLoews CorporationRenault SAMediaTek Electric Holdings CorporationSolvay SAMeiji Holdings Co.