CUHK Business School Research Finds the Inconsistent ESG Scores from Different Rating Agencies Decreased Investor Demand for Green Stocks

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HONG KONG SAR – Media OutReach – 24 September 2021 – Sustainable investing, once viewed as an outlier maybe only a decade ago, has never been more popular. To put things into perspective, sustainable funds in the U.S. attracted record investment of nearly US$2 trillion in the first quarter of 2021, according to industry data provider Morningstar. As demand for ESG (environmental, social and governance) investing grows, so does the need for better quality ESG performance data. However, a recent research study has found that ESG ratings of firms provided by different agencies can be confusing to investors and may be holding back the sustainable investment sector from realising its full potential.

It is not uncommon for the ratings of different ESG rating providers to be widely dissimilar. For example, Tesla Inc. is rated average by MSCI ESG ratings but categorised as high risk by Sustainalytics. (source: iStock)


Sustainable investing, also known as ESG investing or socially responsible investing, is an approach that asks investors to consider a company’s ESG profile alongside its financials when making an investment decision. Such additional factors include everything from a company’s energy use, waste and pollution, to its working conditions, participation in its community and diversity in its board of directors. Because of these considerations, it is not unusual for sustainability-minded investors to set maximum thresholds or even shy away altogether from less “ethical” sectors such as coal, defence, gaming or tobacco.


Perhaps due to its relatively recent arrival in the finance world – the term ESG investing itself was first coined by the U.N. Global Compact as part of a landmark 2004 study titled Who Cares Wins, there is no universal standard nor a commonly accepted methodology for calculating ESG ratings among different agencies. According to KPMG, there are around 30 major ESG data providers worldwide in 2020. These rating agencies usually adopt different measurements when constructing their ESG scores. It is not uncommon for them to provide different ESG ratings for the same company. For example, Tesla Inc. is rated average by MSCI ESG ratings but categorised as high risk by Sustainalytics.


The new study Sustainable Investing with ESG Rating Uncertainty was co-conducted by Si Cheng, Assistant Professor in the Department of Finance at The Chinese University of Hong Kong (CUHK) Business School, Prof. Doron Avramov at IDC Herzliya, Prof. Abraham Lioui at EDHEC Business School and Prof. Andrea Tarelli at the Catholic University of Milan.


In their study, Prof. Cheng and her co-authors tested their hypothesis using U.S. stocks from 2002 to 2019 and examined the ratings from six major ESG rating providers – Asset4 (Refinitiv), MSCI KLD, MSCI IVA, Bloomberg, Sustainalytics and RobecoSAM. In line with existing studies on ESG ratings, the research team also found considerable disparity across different ESG rating providers. They found that the confusion in the different ratings provided by the ESG rating agencies made sustainable investing riskier and decreased investor demand for stocks.


Ratings Disagreement

“Generally, because there’s a lack of consensus in reporting, measuring and interpreting ESG information, there’s a lot of ESG data out there on firms and these can both be overwhelming and perplexing. That’s why it can be difficult for investors to ferret out the ‘true colour’ of a firm, whether that be, green, brown, or something in between,” Prof. Cheng says. “That in turn feeds back into investor appetite in sustainable investment. If an investor is looking for ESG plays and they’re not clear about the sustainability of the stock they’re about to sink money into, then they obviously are going to think twice before proceeding.”


Using data from the six ESG rating providers, the researchers generated an ESG score for each stock, as well as a score to measure the difference in the ESG scores between the six agencies in order to calculate the level of uncertainty in ESG ratings. According to the results, the average rating correlation is only 0.48, and the average ESG rating uncertainty is 0.18. For perspective, this means that a company could be ranked in the bottom third by one data provider but be ranked in the 59th percentile by another.


Using these scores, the researchers looked at how inconsistency in ESG ratings affected whether an institutional owner would invest in a particular stock, and the impact on the stock’s actual performance on the market. The study considered three distinct types of investors. The first type are organisations such as pension funds as well as university and foundation endowments, which constrain their investments to socially acceptable norms (such as by engaging in socially responsible investing) when compared with other institutional investors which are more interested in generating financial returns, such as hedge funds.


The study found that institutions which were more constrained by investment norms were indeed in favour of greener firms, but were less likely to hold green stocks when there is a high level of inconsistency over ESG ratings. For companies with the highest ESG scores, norm-constrained institutions on average hold 22.8 percent of their shares, but only when the ratings put out by the different ESG agencies were in high agreement. When the correlation in ESG ratings between the different ratings agencies were low, institutional ownership level dropped to 18.1 percent.


In contrast, hedge funds invest more in brown stocks on average, and rating uncertainty mostly affects their holdings for brown stocks. For companies with the lowest ESG scores in the study, the researchers found that hedge funds owned an average of 15.7 percent of shares when there was high agreement between the ESG scores from different ratings agencies. This again dropped to 13 percent when the correlation in the ratings from different agencies diverged. The authors conclude that rating uncertainty matters the most for investors in their preferred investment universe.


And while companies which focus on improving their ESG performance are expected to deliver lower investment returns because they provide nonpecuniary benefits to investors, the study found that this was not always the case. Specifically, it found that brown stocks always outperform green stocks only when ESG ratings ambivalence is low. When there is a high level of agreement between the ratings of different ESG rating agencies, brown stocks surpass green stocks by 0.59 percent per month in absolute returns and 0.40 percent per month in risk-adjusted returns. But when inconsistency between ESG ratings rises, there is no clear relation between a company’s ESG leanings and their stock performance.


Market Implications

Lastly, the study implies that ambiguity in ESG ratings has an overall impact on the entire stock market. In particular, a higher level of ratings confusion is linked with higher market premium, as well as lower stock market participation and lower economic welfare for ESG-sensitive investors.


Green stocks are harmed the most when ESG rating confusion is high. Firms which take a more responsible path in their operations are disproportionately penalized if ratings agencies fail to agree on their ESG profile. This in turn would further limit their ability to make capital investment and generate a real social impact.


“In the face of uncertainty over a company’s ESG profile, ESG-sensitive investors are just as likely to stop making ESG investments or engage in corporate ESG matters,” Prof. Cheng adds.


Overall, the study results have significant implications for asset allocation, investor welfare, and asset pricing. In order to minimise the downside brought to ESG investing by rating inconsistency, Prof. Cheng and her co-authors suggest companies disclose more candid reports on their ESG performance. For ESG rating providers, the researchers advise them to further release and explain their measurement practices and methodologies. Furthermore, they argue that more public discussion on how to measure ESG performance of companies should help to elevate the quality of ESG ratings.


“Sustainable investing is on the rise. Therefore, the overall impact of ESG rating inconsistency will become even more prominent,” Prof. Cheng says.



Avramov, Doron and Cheng, Si and Lioui, Abraham and Tarelli, Andrea, Sustainable Investing with ESG Rating Uncertainty (July 26, 2021). Available at SSRN: or


This article was first published in the China Business Knowledge (CBK) website by CUHK Business School:


About CUHK Business School

CUHK Business School comprises two schools – Accountancy and Hotel and Tourism Management – and four departments – Decision Sciences and Managerial Economics, Finance, Management and Marketing. Established in Hong Kong in 1963, it is the first business school to offer BBA, MBA and Executive MBA programmes in the region. Today, CUHK Business School offers 9 undergraduate programmes and 18 graduate programmes including MBA, EMBA, Master, MSc, MPhil and Ph.D. The School currently has more than 4,600 undergraduate and postgraduate students from 20+ countries/regions.

In the Financial Times Executive MBA ranking 2020, CUHK EMBA is ranked 15th in the world. In FT‘s 2021 Global MBA Ranking, CUHK MBA is ranked 48th. CUHK Business School has the largest number of business alumni (40,000+) among universities/business schools in Hong Kong – many of whom are key business leaders.

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