Comparative assessment of ESG ratings methodology and results based on XBRL

Bence Lukács, Péter Molnár, Robert C. Rickards

Article ID: 8641
Vol 8, Issue 12, 2024

VIEWS - 15 (Abstract) 7 (PDF)

Abstract


This study provides a comparative analysis of Environmental, Social, and Governance (ESG) ratings methodologies and explores the potential of eXtensible Business Reporting Language (XBRL) to enhance transparency and comparability in ESG reporting. Evaluating ratings from different agencies, the research identifies significant methodological inconsistencies that lead to conflicting information for investors and stakeholders. Statistical tests and adjusted rating scales confirm substantial divergence in ESG scores, primarily due to differing data categories and indicators used by rating firms. Using a sample of 265 European companies, the study demonstrates that individual ESG agencies report markedly different ratings for the same firms, which can mislead stakeholders. It proposes that XBRL based reporting can mitigate these inconsistencies by providing a standardized framework for data collection and reporting. XBRL enables accurate and efficient data collection, reducing human error and enhancing the transparency of ESG reports. The findings advocate for integrating XBRL in ESG reporting to achieve higher levels of comparability and reliability. The study calls for greater regulatory oversight and the adoption of standardized taxonomies in ESG reporting to ensure consistent and comparable data across sectors and jurisdictions. Despite challenges like the lack of a standardized taxonomy and inconsistent adoption, the research contends that XBRL can significantly improve the reliability of ESG ratings. In conclusion, this study suggests that standardizing ESG data through XBRL could provide a viable solution to the unreliability of current ESG rating scales, supporting sustainable business practices and informed decision making by investors.


Keywords


ESG ratings; ESG reporting; XBRL; sustainability reporting

Full Text:

PDF


References


Aksoy, M., Yilmaz, M. K., Topcu, N., Uysal, Ö. (2021). The impact of ownership structure, board attributes and XBRL mandate on timeliness of financial reporting: evidence from Turkey. Journal of Applied Accounting Research, 22(4), 706–731. https://doi.org/10.1108/JAAR-07-2020-0127

Avramov, D., Cheng, S., Lioui, A., Tarelli, A. (2022). Sustainable investing with ESG rating uncertainty. Journal of Financial Economics, 145(2), 642–664. https://doi.org/10.1016/j.jfineco.2021.09.009

Berg, F., Koelbel, J. F., Rigobon, R. (2022). Aggregate confusion: The divergence of ESG ratings. Review of Finance, 26(6), 1315–1344. https://doi.org/10.1093/rof/rfac033

Chang, C. J., Chou, C. C. (2015). Enhancing electronic reporting in business information supply chain: using XBRL to establish the enterprise reporting engine. International Journal of Economics and Business Research, 9(2), 137–157. https://doi.org/10.1504/IJEBR.2015.067362

Chou, C. C., Chang, C. J., Peng, J. (2016). Integrating XBRL data with textual information in Chinese: A semantic web approach. International Journal of Accounting Information Systems, 21, 32–46. https://doi.org/10.1016/j.accinf.2016.04.002

EU. (2023). Transparency and integrity of Environmental, Social and Governance (ESG) rating activities. Available online: https://oeil.secure.europarl.europa.eu/oeil/popups/ficheprocedure.do?reference=2023/0177(COD)&l=en (accessed on 18 September 2023).

Faccia, A., Manni, F., Capitanio, F. (2021). Mandatory ESG reporting and XBRL taxonomies combination: ESG ratings and income statement, a sustainable value-added disclosure. Sustainability, 13(16), 8876. https://doi.org/10.3390/su13168876

Gibson Brandon, R., Krueger, P., Schmidt, P. S. (2021). ESG rating disagreement and stock returns. Financial Analysts Journal, 77(4), 104–127. https://doi.org/10.1080/0015198X.2021.1963186

Kaya, D. (2014). The influence of firm-specific characteristics on the extent of voluntary disclosure in XBRL: Empirical analysis of SEC filings. International Journal of Accounting and Information Management, 22(1), 2–17. https://doi.org/10.1108/IJAIM-05-2011-0007

Liu, C., Luo, X. R., Wang, F. L. (2017). An empirical investigation on the impact of XBRL adoption on information asymmetry: Evidence from Europe. Decision Support Systems, 93, 42–50. https://doi.org/10.1016/j.dss.2016.09.004

Miścikowska, D. (2022). An exploratory study on preparers’ perception of ESEF reporting: evidence from the Warsaw Stock Exchange. Folia Oeconomica Stetinensia, 22(1), 191–218. https://doi.org/10.2478/foli-2022-0010

Molnár, P., Suta, A., Tóth, Á. (2023). Sustainability Accounting for Greenhouse Gas Emissions Measurement using the GREET LCA Model: Practical Review of Automotive ESG Reporting. Available online: https://doi.org/10.1007/s10098-023-02588-y (accessed on 29 September 2023).

Mousa, R., Ozili, P. K. (2022). A Futuristic View of Using XBRL Technology in Non-Financial Sustainability Reporting: The Case of the FDIC. Journal of Risk and Financial Management, 16(1), 1. https://doi.org/10.3390/jrfm16010001

MSCI. (2023a). ESG Ratings. Measuring a company’s resilience to long-term, financially relevant ESG risks. Available online: https://www.msci.com/our-solutions/esg-investing/esg-ratings (accessed on 29 September 2023).

MSCI. (2023b). Available online: https://www.msci.com/esg-and-climate-methodologies (accessed on 29 September 2023).

Muñoz, F. F., Valentinetti, D., Rodriguez, M. M., Nieto, Á. M. (2018). The role of XBRL on EMAS reporting: an analysis of organisational values compatibility. Scientific Annals of Economics and Business, 65(4), 497–514. https://doi.org/10.2478/saeb-2018-0025

Refinitiv. (2022). Available online: https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-esg-scores-methodology.pdf (accessed on 29 September 2023).

Refinitiv. (2023). Available online: https://www.refinitiv.com/en/sustainable-finance/esg-scores (accessed on 29 September 2023).

S&P Global. (2022). Available online: https://www.spglobal.com/esg/documents/sp-global-esg-scores-methodology-2022.pdf (accessed on 29 September.2023).

S&P Global. (2023). Available online: https://spgi-mkto.spglobal.com/S1-EMC-20230119-GL-PC-Nature-Methodology-Launch_Sustainability-Yearbook-2023-Download-Form.html (accessed on 29 September 2023).

Seele, P. (2016). Digitally unified reporting: how XBRL-based real-time transparency helps in combining integrated sustainability reporting and performance control. Journal of Cleaner Production, 136, 65–77. https://doi.org/10.1016/j.jclepro.2016.01.102

Seele, P. (2017). Predictive Sustainability Control: A review assessing the potential to transfer big data driven ‘predictive policing’to corporate sustainability management. Journal of cleaner production, 153, 673–686. https://doi.org/10.1016/j.jclepro.2016.10.175

Sustainalyitcs. (2023). Available online: https://www.sustainalytics.com/esg-rating (accessed on 29 September 2023).

Suta, A., Tóth, Á., Borbély, K. (2022). Presenting Climate-related Disclosures in the Automotive Sector: Practical Possibilities and Limitations of Current Reporting Prototypes and Methods. Chemical Engineering Transactions, 94, 379–384. https://doi.org/10.3303/CET2294063

Tóth, Á., Suta, A. (2021). Global sustainability reporting in the automotive industry via the eXtensible business reporting language. Chemical Engineering Transactions, 88, 1087–1092. https://doi.org/10.3303/CET2188181

Tóth, Á., Suta, A., Pimentel, J., Argoti, A. (2023). A comprehensive, semi-automated systematic literature review (SLR) design: Application to P-graph research with a focus on sustainability. Journal of Cleaner Production, 137741. https://doi.org/10.1016/j.jclepro.2023.137741

Tóth, Á., Szigeti, C., Suta, A. (2021). Carbon accounting measurement with digital non-financial corporate reporting and a comparison to European automotive companies statements. Energies, 14(18), 5607. https://doi.org/10.3390/en14185607

XBRL. (2022). Available online: https://www.xbrleurope.org/wp-content/uploads/2022/05/Interconnectivity-enabled-through-XBRL-_paper1-_-final-PM-review-14.04.22_formatted.pdf (accessed on 18 September 2023).




DOI: https://doi.org/10.24294/jipd.v8i12.8641

Refbacks

  • There are currently no refbacks.


Copyright (c) 2024 Bence Lukács, Péter Molnár, Robert C. Rickards

License URL: https://creativecommons.org/licenses/by/4.0/

This site is licensed under a Creative Commons Attribution 4.0 International License.