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ESG Viewpoint:
Dr. Julian Kölbel

# RepRisk interviews Dr. Julian Kölbel, Academic Advisory Board Member

# November 2022

1. RepRisk: One of the interesting findings from the Aggregate Confusion paper is that the difference in ESG scores cannot be solely attributed to differing methodologies. You found that there's substantial diversion between scores, even when they were based on similar methodologies. Can you please share the implications of this finding for investors?

Julian Kölbel: We find that the divergence in the raw data that underlies ESG ratings contributes about half of the overall divergence, and so the implication of that is that it's very difficult to understand why these ratings diverge.

Ideally, you'd want to drill down to the very bottom and see what is causing this difference. Is it that one rating emphasizes the environment more than the other? That would make sense. Or that one provider thinks that a particular company has its emissions under control while the other one doesn't? As an investor, that would be a point where you could do additional research and make up your mind about what is most important to you.

That would be the ideal case, but for that to work you need the aggregation methodology and the actual raw data. If you have neither of those, it's impossible to know why there are differences in the scores, and I think that leads to a lot of frustration.

2. RR: What are some of the solutions to the problem of aggregate confusion with ratings? What can data providers do? As an industry, what should we be doing?

JK: I think that transparency is one obvious response. Because that allows investors to trust that the numbers that they are seeing are based on something that makes sense to them and that they can independently ascertain. Transparency alleviates the concerns that there might be flaws in the data, because you can test for that.

And another recommendation I have is to have a consistent architecture of the ESG issues. From a practical point of view, it's tricky if you have 215 versus 78 versus 24 ESG issues. And obviously you can slice and dice ESG in many ways, but for the purpose of comparison and coherence, a standardized set of issues has a couple of advantages. 

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