Sung Eun (Summer) Kim (University of California, Irvine School of Law) has posted The Duality of Variance Among ESG Assessments (Missouri Law Review, Vol. 88, No. 2, 2023) on SSRN.  Here is the abstract:

As more attention is given to environmental, social, and governance (“ESG”) considerations of firms, ESG data and ratings providers are serving an increasingly important function in the corporate discourse. It is reported that there were more than 160 ESG data and ratings providers in 2020, and more than 600 ESG ratings and rankings products available globally as of 2018. Even as the ESG provider and product markets have grown exponentially, however, the lack of ESG data has been cited as an impediment to a broader embrace of the ESG movement. One source of this perception of inadequacy originates from the widely reported variance among ESG assessments.

Variance among assessments may be a source of concern if it results from inconsistent application of methodologies, poor quality data, conflicts of interest, error, prejudice, or bias. At the same time, convergence is not necessarily a proxy for reliability and may itself also be the product of inflation, laxity, groupthink, or monopolistic market conditions. This was the case with the credit ratings of structured finance products during the 2007–2008 period, which were highly convergent, yet were later found to have been inflated and believed to have been the catalyst of one of the most devastating financial recessions in recent history.

It is this duality of variance among assessments, that they can be both harmful and desirable, and the implications of this duality on the ESG movement, that are the subject of this Article. The Article provides an analytical and regulatory framework that can be used to identify and mitigate harmful forms of variance and convergence among ESG assessments.

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