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INTRODUCTION
In the last two decades the interest in socially responsible investing (SRI), also known as ethical investing or sustainable investing, has increased enormously around the world. The concept of SRI comprises the inclusion of non-financial issues such as environmental, social and corporate governance (ESG) aspects in the investment selection process. ESG ratings provided by specialized rating institutions play an important role in the decision-making process of managers and investors who care about social responsibility as well as for numerous studies. In contrast to the first few articles analyzing the validity and convergence of different ESG metrics, we refer to all three ESG dimensions and empirically compare three ESG rating approaches with respect to the question whether the final ESG appraisal coincides. In addition, we are the first to explore the question of ESG risk in the sense of changes in a company's ESG level over time. This is of relevance to some investors, fund managers and subject to newer methods on portfolio selection based on financial and non-financial information.
Socially responsible (SR) investments are typically identified within a screening process. One can generally distinguish between a negative and a positive approach. The negative method excludes companies involved in controversial business sectors such as alcohol, gambling, tobacco or weapons. As opposed to this, a positive screening process selects companies based on corporate social performance (CSP) measures referring to the assessment of corporate social responsibility (CSR) decisions (see, for example, McWilliams and Siegel, 2001; Renneboog et al , 2008; Luo and Bhattacharya, 2009). Since a positive screening process requires extensive research, specialized rating institutions offer so-called ESG ratings, which evaluate a company's efforts to implement environmental, social and governance issues. Some of the most important ESG rating providers are ASSET4 by Thomson Reuters, Ethical Investment Research Service (EIRIS), Kinder Lydenberg Domini & Co. (KLD) by MSCI and Sustainability Asset Management Group (SAM). Other providers, such as Bloomberg Sustainability, report ESG disclosure scores.
Managers and investors use these ESG ratings within their decision-making process. Furthermore, a wide range of empirical papers is based on ESG ratings. Chatterji and Toffel (2010) discover that firms and their managers react on being rated. Companies with poor KLD ratings improve the environmental performance to a higher extent than high-rated competitors....