Vol.:(0123456789) 1 3 Journal of Business Ethics https://doi.org/10.1007/s10551-019-04164-1 ORIGINAL PAPER The Inﬂuence of Firm Size on the ESG Score: Corporate Sustainability Ratings Under Review Samuel Drempetic 1,2 · Christian Klein 1 · Bernhard Zwergel 1 Received: 21 December 2017 / Accepted: 17 April 2019 © Springer Nature B.V. 2019 Abstract The concept of sustainable and responsible (SR) investments expresses that every investment should be based on the SR investor’s code of ethics. To a large extent the allocation of SR investments to more sustainable companies and ethical prac- tices is based on the environmental, social, and corporate governance (ESG) scores provided by rating agencies. However, a thorough investigation of ESG scores is a neglected topic in the literature. This paper uses Thomson Reuters ASSET4 ESG ratings to analyze the inﬂuence of ﬁrm size, a company’s available resources for providing ESG data, and the availability of a company’s ESG data on the company’s sustainability performance. We ﬁnd a signiﬁcant positive correlation between the stated variables, which can be explained by organizational legitimacy. The results raise the question of whether the way the ESG score measures corporate sustainability gives an advantage to larger ﬁrms with more resources while not providing SR investors with the information needed to make decisions based on their beliefs. Due to our results, SR investors and scholars should reopen the discussion about: what sustainability rating agencies measure with ESG scores, what exactly needs to be measured, and if the sustainable ﬁnance community can reach their self-imposed objectives with this measurement. Keywords Data availability · ESG rating · Firm size bias · Measurement of corporate sustainability · Organizational legitimacy · Sustainable and responsible investment (SRI) JEL Classiﬁcation C33 · M14 · L25 Introduction Sustainable ﬁnance has gained more and more attention: for investors worldwide (Global Sustainable Investment Alliance (GSIA) 2017), in European (European Commis- sion 2018) and international politics (G20 Green Finance Study Group 2017) 1 as well as in the research community. A core question in sustainable ﬁnance research has been the relationship between corporate sustainability performance (CSP) and corporate ﬁnancial performance (CFP). More than 2200 empirical studies have examined the relationship between CFP and environmental, social, and corporate gov- ernance (ESG) criteria, as a proxy for CSP (Friede et al. 2015). Virtually all of these studies use data from sustain- ability rating agencies to quantify sustainability. Less often discussed is what these agencies really measure with ESG scores, and what sustainable and responsible (SR) investors and researchers want the scores to measure. This paper sug- gests that some ESG scores do not provide the information researchers and SR investors need for their analyses. To understand the idea of sustainable finance, it is important to know what an ESG score, as a proxy for CSP, should measure for the user. For this reason, it is neces- sary to deﬁne the aim of sustainable ﬁnance. Soppe (2004) * Samuel Drempetic samuel.drempetic@uni-kassel.de; samuel.drempetic@steylerbank.de Christian Klein klein@uni-kassel.de Bernhard Zwergel b.zwergel@uni-kassel.de 1 University of Kassel, Henschelstr. 4, 34109 Kassel, Germany 2 Steyler Ethik Bank, Arnold-Janssen-Str. 22, 53757 St Augustin, Germany 1 For the development and the growing attention, it is irrelevant that some of the political initiatives are not really ‘sustainable ﬁnance’, because the focus is often only on the environment and so it should actually be considered green ﬁnance.