Estimating ESG Scores Separately
Department of Economics Examiners' Prize for Best Dissertation, University of Warwick, 2023. Recommended for publication.
ESG ratings are mostly noise. In 2022, $2.5tn was invested in ESG funds on the assumption that the ratings capture something real. I tested this using an instrumental variable approach, treating competing agencies' scores as instruments for each other, to separate signal from noise.
More than 50% of the aggregate ESG score is noise. For environmental ratings it's over 85%. Most ESG-driven investment decisions are made on noise, not signal. This has since become more widely acknowledged. It wasn't the consensus when I published this in 2023.