Size Bias in Refinitiv Datasets

Are larger firms still advantaged by ESG ratings?

Juris Dobrick, Christian Klein, and Bernhard Zwergel analysed Refinitiv's ESG ratings to assess whether they successfully mitigated their size bias as they claimed in 2022.

The short answer is no, with more details available in their article on the influence of size on the different pillars of Refinitiv's extra-financial scores:

• The authors used a range of proxies for company size: number of employees, total assets, market capitalisation and revenues.
• Using ESG, E, S, and G ratings, they find the size bias has increased since 2019, even though Refinitiv claimed they already corrected this bias in 2022.
• On average, an increase of one unit in company size leads to an increase of 5.8 in ESG scores, when it was only 3.5 in 2019.
• Regarding Environmental scores, the increase amounts to 6.7 units today, compared to 4 in 2019.
• The Social and Governance scores, which were not analysed in 2019, now show a bias of 6.3 and 3.7 respectively.

These findings are of particular interest for market practitioners using Refinitiv data, as they may unknowingly be introducing a size bias into their models and investment decisions.

The authors propose a correction factor for practitioners to compensate for the bias. Refinitiv should however be the one using it so as not to deceive their clients with misleading claims on their biases' management.