ESG Fund Ratings—The Confusion of Aggregates?

Based on 11,000 UCITS funds, this article investigates the extent and drivers of (dis)agreement among ESG fund ratings from three well-known providers: MSCI, Morningstar, and LSEG Lipper. Utilizing inter-rater agreement measures (IRAs), we identify 1) the existence of an explicit ESG fund mandate, 2) the size of companies included in a fund, 3) the development of markets into which the fund invests, 4) the share of securities for which ESG ratings are available, 5) the fund's asset class, and 6) the fund's management style (index vs. active) as substantial drivers of ratings (dis)agreement. With 34% for equity funds and 41% for fixed income funds, we find the average of the share of funds for which any two rating providers assign the same (adjusted) rating to be quite low. Funds without an explicit ESG mandate, small cap funds, emerging market funds, funds with high coverage ratios, fixed income funds, and index funds show lower ESG rating agreement than their respective counterparts. Our results help investors make more informed decisions when they use ESG ratings in their investment decisions.