The Influence of Firm Size on the ESG Score: Corporate Sustainability Ratings Under Review
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ORIGINAL PAPER
The Influence of Firm Size on the ESG Score: Corporate Sustainability Ratings Under Review Samuel Drempetic1,2 · Christian Klein1 · Bernhard Zwergel1 Received: 21 December 2017 / Accepted: 17 April 2019 © Springer Nature B.V. 2019
Abstract The concept of sustainable and responsible (SR) investments expresses that every investment should be based on the SR investor’s code of ethics. To a large extent the allocation of SR investments to more sustainable companies and ethical practices is based on the environmental, social, and corporate governance (ESG) scores provided by rating agencies. However, a thorough investigation of ESG scores is a neglected topic in the literature. This paper uses Thomson Reuters ASSET4 ESG ratings to analyze the influence of firm size, a company’s available resources for providing ESG data, and the availability of a company’s ESG data on the company’s sustainability performance. We find a significant positive correlation between the stated variables, which can be explained by organizational legitimacy. The results raise the question of whether the way the ESG score measures corporate sustainability gives an advantage to larger firms with more resources while not providing SR investors with the information needed to make decisions based on their beliefs. Due to our results, SR investors and scholars should reopen the discussion about: what sustainability rating agencies measure with ESG scores, what exactly needs to be measured, and if the sustainable finance community can reach their self-imposed objectives with this measurement. Keywords Data availability · ESG rating · Firm size bias · Measurement of corporate sustainability · Organizational legitimacy · Sustainable and responsible investment (SRI) JEL Classification C33 · M14 · L25
Introduction Sustainable finance has gained more and more attention: for investors worldwide (Global Sustainable Investment Alliance (GSIA) 2017), in European (European Commission 2018) and international politics (G20 Green Finance Study Group 2017)1 as well as in the research community. A core question in sustainable finance research has been the relationship between corporate sustainability performance * Samuel Drempetic samuel.drempetic@uni‑kassel.de; [email protected] Christian Klein klein@uni‑kassel.de
(CSP) and corporate financial performance (CFP). More than 2200 empirical studies have examined the relationship between CFP and environmental, social, and corporate governance (ESG) criteria, as a proxy for CSP (Friede et al. 2015). Virtually all of these studies use data from sustainability rating agencies to quantify sustainability. Less often discussed is what these agencies really measure with ESG scores, and what sustainable and responsible (SR) investors and researchers want the scores to measure. This paper suggests that some ESG scores do not provide the information researchers and SR investors need for their analyses. To understand the idea of sustainable finance, it is important to know what an ESG score, as a
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