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Can ESG ratings still be trusted as an assessment of environmental, social and governance behavior? A study of the impact fund market

Wittamer, Guillaume
(2023)

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WittamerGuillaume_75391600_2023.pdf
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Details

Supervisors
Hasse, Jean-Baptiste
Faculty
Louvain School of Management
Degree label
Master [120] : ingénieur de gestion, à finalité spécialisée
Abstract
In recent years, Environmental, Social, and Governance (ESG) ratings have gained significant prominence in evaluating the sustainability and societal impact of investment funds. However, concerns have arisen about the reliability of these ratings due to discrepancies among scores from different rating agencies. This study aims to comprehensively analyze ESG ratings of impact funds from various entities to assess the credibility of these metrics, identify reasons for their divergence, and explore implications for investment decisions. The research commences with an extensive literature review on ESG ratings, ESG funds, and potential divergences in these ratings. Subsequently, a diverse dataset of ESG ratings is utilized, offering a comprehensive view of the rating landscape. Based on the analyses conducted, two hypotheses are developed concerning ESG ratings for impact funds. The first correlation analysis reveals inadequate agreement among ESG ratings from different agencies, implying difficulty in trusting ratings for the same actions. The second analysis examines the distribution of these scores, demonstrating that rating agencies favor different ESG pillars and exhibit a rater effect on their ratings, leading to varied high ratings for different companies across agencies. This finding introduces a new reason for the divergence in ESG ratings.