Do ratings of firms converge? Implications for managers, investors and strategy researchers

Abstract

Research summary: Raters of firms play an important role in assessing domains ranging from sustainability to corporate governance to best places to work. Managers, investors, and scholars increasingly rely on these ratings to make strategic decisions, invest trillions of dollars in capital, and study corporate social responsibility (CSR), guided by the implicit assumption that the ratings are valid. We document the surprising lack of agreement across social ratings from six well-established raters. These differences remain even when we adjust for explicit differences in the definition of CSR held by different raters, implying the ratings have low validity. Our results suggest that users of social ratings should exercise caution in interpreting their connection to actual CSR and that raters should conduct regular evaluations of their ratings. Managerial summary: Ratings of corporate social responsibility (CSR) guide trillions of dollars of investment, but managers, investors, and researchers know little about whether these ratings INTRODUCTIONHow much do we really know about corporate social responsibility (CSR)? Though many managers, investors, and scholars have embraced this concept, the ratings most often used to assess CSR have rarely been evaluated. If these ratings are invalid, then trillions of dollars of capital is Keywords: corporate social responsibility; ratings; corporate governance; socially responsible investing; performance measurement *Correspondence to: Aaron K. Chatterji, Fuqua School of Business, Duke University, 1 Towerview Road, Durham, NC 27708, U.S.A. E-mail: ronnie@duke.edu Copyright © 2015 John Wiley & Sons, Ltd. potentially being misallocated and numerous academic findings may also not be valid.In this study, we assess the convergent validity (that is, agreement) of six well-established social ratings. We find that these raters exhibit low convergence in their assessments of CSR. 1 This lack of agreement is not just due to announced differences in raters' theorization of CSR; for example, if they measure performance relative to an industry 1 When discussing the behavior of raters, we use the term convergence. When referring to the rating they provide, we use the term convergent validity. We do not wish to imply that convergence implies a particular time trend. We apply this term to describe overlap across ratings systems at a particular point in time. A. Chatterji et al.group or in absolute terms. Instead, the low agreement implies all or almost all of the ratings have low validity. This result has important implications for managers, investors, and researchers who use these ratings.Many managers spend significant time and resources on CSR activities. For example, analysts claim that nearly every Fortune 500 company releases some kind of sustainability report.2 Eight thousand firms have signed the UN Global Compact as a sign of their commitment to CSR.3 As CEOs and other top managers respond to growing pressure from multiple stakeholders over social issues (Bansal and Roth, 2000;Crilly...

A Taxonomy of Climate Accounting Principles for Financial Portfolios

“…Research by Schroeders shows a low correlation between different ESG scores (Figure 1b) [22]. Similar research by Chatterji et al from 2013 suggest that the overlap in ratings ranges between 19% and 60% [23]. They conclude that "low convergent validity between SRI raters is not only driven by different theorizations, but also by low commensurability among most pairs of raters."…”

“…They conclude that "low convergent validity between SRI raters is not only driven by different theorizations, but also by low commensurability among most pairs of raters." [23] Similarly, commonly used metrics used as proxies for company level climate impact may not have significant correlation. As a simple analysis demonstrating this point, the author mapped the correlation between the absolute Scope 1 GHG emissions, as measured by Trucost (based on 2015 data), for a sample of 50 electric utilities and their absolute installed capacity for coal power and gas power of the associated electric utilities (also using 2015 data) ( Figure 1a).…”

Corporate Social Responsibility as a Strategic Shield Against Costs of Earnings Management Practices

“…The validity and consistency of CSR scores, widely used in the ethical investments sector and academic research, is a hotly contested issue. Delmas et al (2013) and Chatterji et al (2014) finds a lack of consistency among CSR scores provided by different organizations covering US companies and point out the lack of transparency in the evaluation process and the dangers in putting too much trust in any one of them. Our results are based on the most widely used measure of CSR covering a large number of international companies and we agree that our measure of CSR also suffer from the same caveat.…”

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“…On the calculative side, designing SRI products involves evaluating whether stocks are 'socially responsible' (Acquier & Aggieri, 2007), an activity that indicates the uncertainties surrounding the measurement of CSR (Chatterji, Durand, Levine & Touboul, 2015;Gond & Crane, 2010). Prior works have confirmed the central role of calculative agencies in the emergence of the French SRI market (Arjaliès, 2010;Déjean et al, 2004;Gond, 2006).…”