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Environmental, Social, Governance scores and the Missing pillar -- Why does missing information matter?

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Listed:
  • Ozge Sahin
  • Karoline Bax
  • Claudia Czado
  • Sandra Paterlini

Abstract

Environmental, Social, and Governance (ESG) scores measure companies' performance concerning sustainability and societal impact and are organized on three pillars: Environmental (E), Social (S), and Governance (G). These complementary non-financial ESG scores should provide information about the ESG performance and risks of different companies. However, the extent of not yet published ESG information makes the reliability of ESG scores questionable. To explicitly denote the not yet published information on ESG category scores, a new pillar, the so-called Missing (M) pillar, is formulated. Environmental, Social, Governance, and Missing (ESGM) scores are introduced to consider the potential release of new information in the future. Furthermore, an optimization scheme is proposed to compute ESGM scores, linking them to the companies' riskiness. By relying on the data provided by Refinitiv, we show that the ESGM scores strengthen the companies' risk relationship. These new scores could benefit investors and practitioners as ESG exclusion strategies using only ESG scores might exclude assets with a low score solely because of their missing information and not necessarily because of a low ESG merit.

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  • Ozge Sahin & Karoline Bax & Claudia Czado & Sandra Paterlini, 2021. "Environmental, Social, Governance scores and the Missing pillar -- Why does missing information matter?," Papers 2106.15466, arXiv.org, revised Jun 2022.
    • Handle: RePEc:arx:papers:2106.15466
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    2. Karoline Bax & Giovanni Bonaccolto & Sandra Paterlini, 2023. "Do lower environmental, social, and governance (ESG) rated companies have higher systemic impact? Empirical evidence from Europe and the United States," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 30(3), pages 1406-1420, May.
    3. Mio, Chiara & Fasan, Marco & Scarpa, Francesco, 2023. "Materiality investor perspectives on utilities’ ESG performance. An empirical analysis of ESG factors and cost of equity," Utilities Policy, Elsevier, vol. 82(C).
    4. Albertina Paula Monteiro & Catarina Cepêda & Cláudia Pereira & Amélia Silva, 2023. "Social Performance Disclosed by European Companies: The Role of the Board Attributes and the Country’s Legal System," JRFM, MDPI, vol. 16(6), pages 1-15, May.

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