Abstract

Sustainable investing is of tremendous interest in both academia and the investment industry. However, despite the interest and the surge in assets under management (AUM) inflow, environment, social, and governance (ESG) data currently remain a fundamental challenge because they are deficient in quantity, consistency, and quality. In light of this data challenge, many investors and academics have come to rely on commercial ESG raters to assess the ESG quality of various corporations. However, the commercial ESG ratings still suffer some notable biases. This article documents one possible bias, termed quantity bias. The authors find that the amount of ESG data available for a given company is positively correlated with the commercial ESG rating of that company and the weighted average cost of its capital. The implication for investors is that they should do their homework and examine what the ESG data actually say rather than simply check the box. For corporations, it implies that they will get favorable treatment in the capital market if they publish more ESG data.

Scientific Portfolio AI- Generated Summary

“The Unreasonable Attractiveness of More ESG Data” is a research paper that explores the challenges and biases surrounding ESG data in sustainable investing. The authors note that despite the interest and surge of assets under management inflow, ESG data currently remains a fundamental challenge as they are deficient in quantity, consistency, and quality. In light of this data challenge, many investors and academics have come to rely on commercial ESG raters to access the ESG quality of various corporations. However, the commercial ESG ratings still suffer some notable biases.

The paper documents one possible bias, termed “quantity bias.” The authors found that the amount of ESG data that is available for a given company is positively correlated with the commercial ESG rating of that company, and also the weighted average cost of capital for that company. The implication for investors is that they should do their homework and examine what the ESG data actually say rather than simply “check the box.” For corporations, it implies that they will get favorable treatment in the capital market if they publish more ESG data.

The paper is related to research published by Silanes, McCahery, and Pudschedl, 2019, in which the authors found that firms with good ESG scores are simply disclosing more information. This paper also contributes to the general stream of behavioral finance, where the authors document a “quantity bias” associated with the amount of information and analyst/market perception.

The ESG data used in this research are collected from Bloomberg. Bloomberg collects its ESG data from publicly available sources, such as companies’ own investor relations websites, from NGOs such as CDP, and other publicly available ESG data sources.

The authors conclude that the unreasonable attractiveness of more ESG data is a real phenomenon, and that investors and corporations should be aware of the quantity bias associated with ESG data. Investors should do their homework and examine what the ESG data actually say rather than simply relying on commercial ESG ratings. Corporations should publish more ESG data to get favorable treatment in the capital market. The authors also suggest that ESG rating providers should be aware of the quantity bias and take steps to mitigate it.