Practical Applications of Divergent ESG Ratings

Abstract

In Divergent ESG Ratings, from the November 2020 issue of The Journal of Portfolio Management, authors Elroy Dimson of the University of Cambridge Judge Business School and Paul Marsh and Mike Staunton of London Business School address inconsistencies in how environmental, social, and governance (ESG) ratings are evaluated by raters and used by asset managers and investors. The authors carried out an extensive review of previous literature on ESG fund and index performance, along with an analysis of variations in ESG ratings given by different rating bodies.

Their analysis found that many popular claims that ESG investing outperforms conventional indexes are unfounded. Furthermore, there is no clear agreement among raters on how individual companies score, or on the relative importance of individual factors of ESG ratings. The divergent ESG ratings provide little to no clear direction for asset managers and investors intending to implement ESG investment strategies.