Abstract

Evaluating companies’ sustainability performance embraces environmental, social, and governance (ESG) activities. Data providers assign companies ESG scores as a quantitative measure based on available information. Refinitiv (previously ASSET4) is a key data provider whose scores are used extensively by researchers and companies; however, their ESG scoring methodology allows the scores from the five most recent years to change post-publication without any announcements. Such ESG scores are called non-definitive. Then, ESG research findings and companies’ sustainability performance using the ESG data from the same data provider might be inconsistent. Optimization and exploratory data mining approaches show that it is possible to change ESG scores to exhibit stronger risk dependence. We discuss how the initial disclosure of ESG information and updating the published ESG information alter the way ESG scores are computed in a given industry group, impacting ESG research findings significantly. Moreover, the initial disclosure of ESG information and an update in the published ESG information might allow some companies to appear more sustainable, even though nothing has changed. Finally, our work indicates the criticality that should be addressed to improve comparability within research studies and companies’ sustainability performance relying on data from the same ESG providers.

Scientific Portfolio AI- Generated Summary

This paper discusses the limitations and inconsistencies of non-definitive Environmental, Social, and Governance (ESG) scoring methodology used by data providers. The authors argue that ESG scores can have a significant impact on companies’ riskiness and financial performance, and therefore, it is crucial to ensure that the scores are accurate and reliable.

The paper provides an overview of Refinitiv’s ESG score construction methodology and highlights the challenges associated with aggregating data from various sources and assigning scores to companies. The authors argue that the lack of standardization and transparency in ESG scoring methodology can lead to inconsistencies and inaccuracies in the scores assigned to companies.

The paper also reviews the literature on the role of ESG scores in impacting companies’ riskiness and financial performance. The authors cite the European Banking Authority’s recent acknowledgment of the need to incorporate ESG risks into overall business strategies and risk management frameworks. They argue that managing ESG risk can act as a driver for managing financial risk and can affect institutions’ financial performance by manifesting themselves in financial risks such as credit risk, market risk, operational risk, liquidity, and funding risks.

The authors conclude that non-definitive ESG scores can have significant consequences for companies and investors and that it is crucial to ensure that the ESG data used is accurate and up-to-date. They suggest that investors and researchers should be cautious when using ESG scores and should consider alternative ESG scoring methodologies that are more reliable.

Overall, this paper provides a valuable contribution to the ongoing debate on the reliability and accuracy of ESG scores. It highlights the challenges associated with aggregating data from various sources and assigning scores to companies and emphasizes the need for standardization and transparency in ESG scoring methodology. The paper also underscores the importance of managing ESG risk as a driver for managing financial risk and highlights the potential consequences of relying on non-definitive ESG scores.