The Information Content of ESG Ratings: Implications for ESG Investing

We examine the informational content of ESG ratings and their implications for sustainable investing. We provide an overview of several major ESG data providers, highlighting their methodological differences and the resulting divergence in ESG interpretations. Focusing on actively managed mutual funds in the US, we measure the extent of the \textit{aggregate confusion} phenomenon and find that the divergence of ESG ratings is significantly lower at the portfolio level compared to individual stocks, suggesting that mutual fund managers prefer holdings with more consistent ESG profiles. We further explore investor preferences regarding ESG characteristics and find notable heterogeneity: Institutional investors are particularly attentive to avoiding firms associated with ESG-related controversies, while retail investors respond more strongly to accessible and intuitive ESG metrics. Our findings offer valuable insight into how ESG information is integrated into investment processes and how different types of investors prioritize ESG considerations in their financial decision-making.