Sense and Nonsense in ESG Ratings

30 Pages Posted: 11 Nov 2020

See all articles by Ingo Walter

Ingo Walter

New York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: September 21, 2020

Abstract

Concerns about the future of the natural environment, prevailing social conditions, and governance of private and public institutions inspire today’s ESG movement. This paper proposes a heuristic that can be useful in examining the ESG-scoring issue. We begin with a social control diagnostic covering business activities – one that addresses the interests and actions of various stakeholders in the system. We examine its dynamics in the context of economic, social, and political pressures, including various initiatives to set standards against which business conduct may be calibrated. We evaluate efforts to create metrics that reflect normative improvements in ESG outcomes and performance scoring against them. We assess the industrial organization of the ESG ratings industry and review key empirical studies of ESG-driven investing. We conclude with policy recommendations intended to alleviate existing shortcomings in ESG ratings and improve their role in capital allocation and corporate governance.

Keywords: Environmental degradation, social impact, sustainability, corporate governance, corporate ratings, target funds, investment fund performance

JEL Classification: B55, D18, D30, D62, D68, D74, F53, H89, I30, K29, K38, K42, K49, Z28

Suggested Citation

Walter, Ingo, Sense and Nonsense in ESG Ratings (September 21, 2020). Ingo Walter (2020), "Sense and Nonsense in ESG Ratings", Journal of Law, Finance, and Accounting: Vol. 5: No. 2, pp 307-336. http://dx.doi.org/10.1561/108.00000049, NYU Stern School of Business Forthcoming, Available at SSRN: https://ssrn.com/abstract=3696718

Ingo Walter (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

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New York University (NYU) - Department of Finance

Stern School of Business
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