The pitfalls of (non-definitive) Environmental, Social, and Governance scoring methodology

25 Pages Posted: 30 Jan 2022 Last revised: 23 Sep 2022

See all articles by Özge Sahin

Özge Sahin

Technische Universität München (TUM)

Karoline Bax

Technische Universität München (TUM) - TUM School of Management

Sandra Paterlini

University of Trento - Department of Economics and Management

Claudia Czado

Technische Universität München (TUM) - Department of Mathematics

Date Written: January 28, 2022

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

Keywords: Corporate social responsibility, data-mining, data quality, ESG scores, risk, sustainability performance

JEL Classification: G24, G30, G32

Suggested Citation

Sahin, Özge and Bax, Karoline and Paterlini, Sandra and Czado, Claudia, The pitfalls of (non-definitive) Environmental, Social, and Governance scoring methodology (January 28, 2022). Global Finance Journal, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4020354 or http://dx.doi.org/10.2139/ssrn.4020354

Özge Sahin (Contact Author)

Technische Universität München (TUM) ( email )

Karoline Bax

Technische Universität München (TUM) - TUM School of Management ( email )

Freising
Germany

Sandra Paterlini

University of Trento - Department of Economics and Management ( email )

Via Inama 5
Trento, I-38100
Italy

Claudia Czado

Technische Universität München (TUM) - Department of Mathematics ( email )

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
346
Abstract Views
1,395
Rank
158,867
PlumX Metrics