Researchers say firms may exaggerate their ESG performance over fears that investors will divest from their stock.
ESG ratings may be working against the overall sustainability of business and may cause companies to “inflate” their ESG performance. These findings come in a study by researchers at the University of Maastricht which looked at whether ESG ratings actually caused firms to exaggerate ESG performance in the hunt for better ratings. The causal chain Dennis Bams and Bram van der Kroft find is this: investors seeking to invest in sustainable companies use ESG ratings because they have difficulty judging performance themselves. A fear investors will divest from their stock prompts companies to take measures to “inflate” their ESG performance, whether or not they are doing well on sustainability. This in turn means ESG ratings fe