Horn, M., Oehler, A., 2022, Constructing Stock Portfolios by Sorting on ESG Ratings: Does the Rating Provider Matter?; New Frontiers in Banking and Capital Markets, December 15-16.

Abstract
An interesting and well documented observation is that the same company receives heterogeneous ESG ratings from different rating providers. Consequently, an important question is whether sorting stocks on ESG ratings of different rating providers results in portfolios that are similar or substantially different regarding their constituents, performance, and risk. We employ the ratings of five rating providers on stocks listed in North America, Europe, Asia-Pacific (excluding Japan), and Japan for the period from 2014 until the end of 2019 and analyze whether the corresponding quintile stock portfolios actually have similar or different portfolio constituents as well as Sharpe ratios, alphas, and idiosyncratic risk. Our analysis indicates that the portfolios have considerable differences regarding their constituents. In contrast, and most importantly, Sharpe ratios, alphas, and idiosyncratic risk of corresponding portfolios do not significantly differ.

Keywords

ESG Rating, Rating Dispersion, Portfolio Performance, Idiosyncratic Risk, Sustainability, Best-in-class

JEL Classifications

G11, G24