Constructing stock portfolios by sorting on ESG ratings: Does the rating provider matter?

An interesting and well documented observation is that the same company receives heterogeneous ESG ratings from different rating providers. Consequently, an important question is whether sorting stocks on ESG ratings of different rating providers results in portfolios that are similar or substantially different regarding their constituents, performance, and risk. We employ the ratings of five rating providers on stocks listed in North America, Europe, Asia-Pacific (excluding Japan), and Japan for the period from 2014 until the end of 2019 and analyze whether the corresponding quintile stock portfolios actually have similar or different portfolio constituents as well as Sharpe ratios, alphas, and idiosyncratic risk. Our analysis indicates that the portfolios considerably differ regarding their constituents. In contrast, and most importantly, Sharpe ratios, alphas, and idiosyncratic risk of corresponding portfolios are not significantly different. • Portfolio sorts on different ESG ratings yield considerably different portfolios. • Surprisingly though, returns, alphas, and idiosyncratic risk of corresponding portfolios do not significantly differ. • The results are similar across different geographical regions. • The results are robust to industry exposure. • The results are robust when minimum variance portfolio optimization is applied