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As investors increasingly look at sustainability metrics to guide decisions, one major challenge has become difficult to ignore: ESG ratings often disagree, at times dramatically. Essentially, different rating agencies evaluate the same company in greatly different ways, which leaves an inconsistent picture of how sustainable a firm truly is. This raises the question of whether disagreement itself contains valuable information — particularly whether high ESG rating dispersion signals higher risk, and whether this translates into higher expected returns.
In our study, we address this question by examining the effect of ESG rating disagreement on stock market performance in the U.S. and European markets between 2010 and 2023. The limited prior studies on the topic suggest that stocks with more rating dispersion may yield excess returns. However, the evidence has remained mixed, and results often depend heavily on the specific periods and methodologies used. We aim to bring clarity with a broader perspective by expanding the time frame and geographical scope, varying the ESG rating providers, and revisiting earlier findings through a wide set of methodological approaches. We also explore whether dispersion affects companies differently depending on their sustainability level; that is, whether companies considered “green” or “brown” are treated differently under rating disagreement.
We compile ESG ratings from several major rating providers and construct measures of disagreement for overall ESG score and its environmental, social, and governance pillars. Using these, we test whether portfolios of high-dispersion stocks outperform their low-dispersion counterparts in the S&P 500 and STOXX 600.
Disagreement Is Persistent but Doesn’t Translate into Consistent Returns
Our first finding confirms substantial and enduring disagreement across rating agencies. Correlations range from mere 0.2 to 0.6 and this dispersion persists across time, regions, and industries. European firms exhibit slightly higher disagreement on average than their U.S. counterparts. This likely reflects a stronger emphasis on sustainability disclosure, which has been linked to a counterintuitive inverse effect on the dispersion of ratings.
Across both the U.S. and European markets, we find no robust evidence that high-dispersion stocks outperform their low-dispersion counterparts. Occasional pockets of significance appear — as pointed out by the prior literature — but they vanish when datasets are extended to more recent years or alternative model specifications. Double-sorting by ESG level likewise yields only isolated and inconsistent effects.
What Does This Mean for Investors and Research?
Our findings challenge the notion of a reliable disagreement premium. Should ESG rating disagreement represent a priced form of risk, we would expect stable, broad-based effects across ESG pillars and markets. Instead, any excess returns appear temporary, context-specific, and thus difficult to replicate ex post. We attribute the lack of disagreement effect to two seemingly contradictory theories on general stock market disagreement: in addition to higher uncertainty entailing higher returns, disagreement can also cause short-term overvaluation and subsequent lower returns. We argue these two theories can coexist and interact within ESG rating disagreement.
For investors, our findings suggest that relying on ESG rating dispersion alone is unlikely to deliver consistent outperformance. Then again, these certainly do not underperform either, which can be a favorable sign of sustainable portfolios. For researchers, it highlights the need to better understand why ESG rating disagreement persists, and why markets seem largely indifferent to it. As sustainability considerations continue to shape global capital markets, understanding how to interpret this noisy and conflicting sustainability information will be essential for both academic research and practical investment strategy.
Iiro Vettervik, Aalto Yliopisto
Kristian Blitson, Aalto Yliopisto
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