Combining E, S, and G Scores: An Exploration of Alternative Weighting Schemes
Sep 2, 2020
How an overall ESG rating is constructed can significantly impact its usefulness. We tested two approaches: equal weighting and backward optimization. Equally weighting E, S, and G pillar scores across sectors showed less financial significance than the stand-alone G pillar score — that is, without E and S scores — over the 13-year study period. Backward optimization showed greater significance than stand-alone G scores but may underestimate the importance of ESG indicators to financial results over longer periods. These results suggest that investors seeking to combine E, S, and G into an aggregate score should proceed with caution. ©2020 Pageant Media. Republished with permission of IPR Journals, from “Combining E, S, and G Scores: An Exploration of Alternative Weighting Schemes.” Linda-Eling Lee, Guido Giese and Zoltan Nágy. Vol. 1, No. 1, 2020.