The Consolidation of the ESG Rating Industry as an Enactment of Institutional Retrogression

Does the consolidation of ESG rating agencies undermine their role as drivers change?

Emma Avetisyan and Kai Hockerts study how consolidation among ESG rating agencies impacts the institutional change promoted by socially responsible investing in their paper The Consolidation of the ESG Rating Industry as an Enactment of Institutional Retrogression.

They use qualitative analysis including 37 interviews with key stakeholders from ESG agencies and rated companies. Their main conclusions include:

• The ESG rating industry's consolidation is largely driven by financial sustainability challenges, forcing smaller agencies to merge or be acquired by larger financial data providers.
• Economies of scale gained through consolidation allow ESG rating agencies to expand their global coverage and product sophistication but often lead to compromised methodological rigour and potential conflicts of interest.
• Consolidation typically strengthens ESG rating agencies' market position, setting industry standards and increasing professionalisation, but at the cost of employee motivation and retention of pioneering expertise.
• ESG ratings are becoming standardised and commoditised, but this integration risks diluting original CSR values, causing a partial institutional regression.
• Sophisticated investors express concerns about reduced research quality following mergers, fearing a shift towards less nuanced, mass-produced ESG data dominated by a few global players.

This research suggests investors should critically evaluate the quality implications of ESG data, and issuers should engage proactively to ensure nuanced ESG impacts are accurately reflected following industry consolidations.

EU policymakers' push for regulation of ESG rating providers to maintain methodological robustness and transparency while reducing conflicts of interest is aligned with these conclusions.

The study faces limitations, including its reliance on qualitative interviews that may introduce respondent bias.