Environmental, Social, Governance scores and the Missing pillar—Why does missing information matter?

Abstract

Environmental, Social, and Governance (ESG) scores measure companies' performance concerning sustainability and are organized in three pillars: Environmental, Social, and Governance. These complementary non‐financial ESG scores should provide information about companies' ESG performance and risks. However, the extent of not yet published ESG information makes the reliability of ESG scores questionable. To explicitly capture the not yet published information on ESG category scores, a new pillar, the so‐called Missing (M) pillar, is proposed and added to the new definition of the Environmental, Social, Governance, and Missing (ESGM) scores. By relying on the data provided by Refinitiv, we show that the ESGM scores strengthen the companies' risk relationship. These new scores could benefit investors and practitioners as ESG exclusion strategies using only ESG scores might exclude assets with a low score solely because of their missing information and not necessarily because of a low ESG merit.

Do lower environmental, social, and governance (ESG) rated companies have higher systemic impact? Empirical evidence from Europe and the United States

“…Both data sets are similar in size, however, the US data exhibits stronger average kurtosis as shown in Table 1. Additionally, we find that the ESG scores of both data sets improve over time as companies are under pressure to improve their ESG performance and continue to disclose more information (see Table 2 and Figure 1) (Sahin et al, 2022).…”

“…The key message is that improvements in terms of ESG performance might lead to lower risk and more stable markets, while instead, companies in the lower ESG classes might contribute the most to systemic risk. Therefore, it is important to support disclosure policies of non-financial information, as ESG class D stocks typically are characterized by a lack of infrastructure and missing information (see Sahin et al, 2022) as well other policies, such as tax incentives, which stimulate companies to increase their efforts and investments in ESG-related activities, this resulting in improved ESG scores. By doing so, information on company characteristics, both financial and non-financial, would increase, providing further insights and knowledge, which we expect to lead to improved overall economic and financial stability, making the system less vulnerable even in times of turmoil.…”

Vine Copula Based Dependence Modeling in Sustainable Finance

“…47 The way ESG scores are calculated and their impact on the financial performance or risk vary depending on the sector, topic, provider, and country. 48,49,50 Another important research study could analyze the dependence structure of the assets' ESG disclosure quality on various topics. It would highlight what seems important to disclose in ESG-related topics for companies.…”

Implementing corporate sustainability information in socially responsible investing: a systematic review of empirical research

“…Although the notion of negative screening is straightforward, our review found that implementing negative screens typically requires additional research efforts. Firstly, given the presence of discernible ESG rating disagreement (Berg et al, 2022;Chatterji et al, 2016;Sahin et al, 2022), investors may exclude different firms based on which rating agencies they consult with. The presence of ESG rating disagreement also affects how investors identify involvement in controversial business operations.…”