An Economic Analysis of Corporate Sustainability Ratings: an investigation into the accuracy of ESG scores in reflecting the climate-related impacts and investments of firms

The purpose of this thesis is to analyse the accuracy of climate-themed scores within third-party corporate sustainability ratings – commonly termed Environmental, Social, and Governance (ESG) ratings - in reflecting companies’ impacts and investments relating to climate change. Case studies of the aviation, steel, and banking sectors are conducted to evaluate the performance of corporate climate scores in this regard. These sectors face varied sets of climate risks and abatement frontiers, and all generate substantial impacts and face significant challenges and opportunities in the context of the low-carbon transition. A range of methodologies are applied: content analyses of corporate reports; correlation and regression analyses; and interviews with high-level sustainability practitioners within multinational firms and industry bodies. Results show that ratings are considered influential in each of the sectors studied. However, climate-themed scores within leading ratings exhibit virtually no substantial relationships with firm-level emissions or climate-related investment data. Multiple interviewees express distrust in ratings, and yet their companies still engage with rating agencies and highlight ratings in public disclosures, apparently to placate investors and other stakeholders. The thesis makes several novel contributions to the literature. These include: providing empirical evidence on the performance of climate scores in reflecting firm-level emissions and investment data in key carbon-intensive sectors, which has not been analysed in the literature to date; providing evidence on specific, potentially superficial drivers of climate scores in certain sectors; and identifying and critically analysing the use of climate scores and ESG ratings in corporate compensation mechanisms in the sectors studied. The results also give rise to clear and actionable recommendations for the improvement of corporate sustainability rating, reporting, and research practices. Key among these are: investors, companies, and researchers should prioritise objective measures of climate impact, rather than third-party ratings, until rating methodologies are adjusted or clarified; rating agencies should weight objective impact data far more heavily in climate evaluation processes; rating agencies should disclose how climate scores align with emissions and investment data, explaining any rationale for apparent discrepancies; and policymakers should mandate or otherwise drive such disclosures. Accurate and credible ratings can offer valuable indicators of corporate climate performance, but existing ratings must be substantially overhauled if they are to fulfil their function of directing capital and stakeholder action to contribute to the low-carbon transition