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Sense and Nonsense in ESG Ratings

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  • Walter, Ingo

Abstract

Concerns about the future of the natural environment, prevailing social conditions, and governance of private and public institutions inspire today’s ESG movement. This paper proposes a heuristic that can be useful in examining the ESG-scoring issue. We begin with a social control diagnostic covering business activities – one that addresses the interests and actions of various stakeholders in the system. We examine its dynamics in the context of economic, social, and political pressures, including various initiatives to set standards against which business conduct may be calibrated. We evaluate efforts to create metrics that reflect normative improvements in ESG outcomes and performance scoring against them. We assess the industrial organization of the ESG ratings industry and review key empirical studies of ESG-driven investing. We conclude with policy recommendations intended to alleviate existing shortcomings in ESG ratings and improve their role in capital allocation and corporate governance.

Suggested Citation

  • Walter, Ingo, 2020. "Sense and Nonsense in ESG Ratings," Journal of Law, Finance, and Accounting, now publishers, vol. 5(2), pages 273-305, September.
    • Handle: RePEc:now:jnllfa:108.00000049
    DOI: 10.1561/108.00000049
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    More about this item

    Keywords

    Environmental degradation; social impact; sustainability; corporate governance; corporate ratings; target funds; investment fund performance;
    All these keywords.

    JEL classification:

    • B55 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Social Economics
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D30 - Microeconomics - - Distribution - - - General
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations
    • H89 - Public Economics - - Miscellaneous Issues - - - Other
    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General
    • K29 - Law and Economics - - Regulation and Business Law - - - Other
    • K38 - Law and Economics - - Other Substantive Areas of Law - - - Human Rights Law; Gender Law; Animal Rights Law
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • K49 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Other

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