What Does an ESG Score Really Say About a Company?
A key gauge in the $30 trillion sustainable investment market provides a murky picture of corporate social responsibility. Research by Anywhere Sikochi and George Serafeim probes the underlying factors.
A recent study shows that the more information a company discloses about its ESG practices, the more rating agencies disagree on how well that company is performing along these dimensions. According to the research, a 10 percent increase in corporate disclosure is associated with a 1.3 to 2 percent increase in ESG score variation among major ratings providers, which all interpret and process disclosures differently.
Sikochi says the research findings point to the need for greater debate about ways to regulate disclosure that would make scoring more predictable for firms and useful for markets. He and his co-authors argue that ESG outcomes are a better way to measure success in environmental protection, social responsibility, and corporate governance than by checking off a company’s written policies.