Unpacking the ESG ratings: Does one size fit all?

Abstract: As ESG investing goes mainstream, investors increasingly rely on ESG ratings when making investment decisions. This study aims to delve into the overall ESG ratings provided by four prominent ESG data providers, focusing on their accounting methodologies, the relevance of the three pillars (environment, social, and governance), and the key performance indicators (KPIs) that drive these ratings. By examining a sample of European and UK companies, we question the significance of the governance and social pillars in explaining the overall ESG scores. Our findings highlight a subset of indicators that exhibit the highest correlation with ESG scores, including the presence of external audits, an environmental supply chain policy, and target emissions. This letter contributes to the ongoing ESG credibility debate and emphasizes the need for further transparency of ESG ratings.