Aggregate Confusion: The Divergence of ESG Ratings

ESG ratings diverge due to differences in scope, weight, and measurement, with measurement accounting for 56% of the variation. Analysts' perceptions also influence ratings, creating a halo effect. While standardizing firm-level disclosures is beneficial, regulating ESG interpretation may hinder innovation. Unlike credit ratings, ESG ratings lack a single measurable outcome, ensuring persistent divergence. Investors must assess rating methodologies to align with their sustainability priorities.