Fund Competition under Conflicting ESG Rating Methodologies

Competing ESG rating providers reward different portfolio attributes. This paper models funds that choose portfolios and fees for investors with heterogeneous ESG priorities. Portfolio changes can improve both providers' scores or favour one methodology over the other, and investor demand determines which methodology each fund targets. Greater disagreement makes provider-specific positioning more productive but common improvement less productive. Funds therefore specialise more, yet both provider scores, investor participation, and equilibrium fees fall in the benchmark equilibrium. Investor heterogeneity creates matching gains from specialisation, while common improvement supports holdings-based ESG exposure. Methodology convergence improves participation and common exposure but weakens matching across investor clienteles. Convergence raises welfare when the social value of common exposure is sufficiently high.