Issues of methodology and objectivity of ESG rating

Abstract

Aim. To identify problems in ESG rating methodology to develop principles for creating an  objective assessment of firms’ sustainability transition efforts.

Tasks. To conduct a brief review of previous studies that analyze the objectivity of ESG-rating; to examine the rating methodology from three companies that specialize in rating firms by ESG criteria; to identify the main so-called failures that affect the objectivity of assessment; to  formulate principles to improve the objectivity of the rating assessment of firms.

Methods. The study considered the methodology of three ESG-ratings: ESG-rating of S&P, the  rating of the American-British company Refinitiv and ESG-rating of the Italian company ECPI. The methods of descriptive analysis, comparative analysis, generalization and systematization have revealed the main directions reflected in the rankings, their similarities and differences as well as the reasons and ways of subjective evaluation which negatively influences the quality of the ranking.

Results. The author presents the evidence of biased evaluation of the considered rankings, caused by a number of factors, including doubtful parameters, taken for evaluation, the use of  biased sources, including data of non-governmental organizations and voluntarily published data on information disclosure. It shows the methodology of calculations, which gives preferences to large businesses, the opacity of the assessment and the ability of experts to adjust information in the process of assessment.

Conclusions. In order to build an objective ESG-evaluation, the stability and durability of the methodology should be ensured, and the changes made should not violate the comparability of the results. It is necessary to rely on a fixed list of disclosures subject to audit, to ensure the objectivity of the indicators under review and to take into account the dynamics of the identified contradictions over a long period. The author proposes to introduce a unified assessment methodology at the national level.