Heterogeneity and Interpretability of the Global Hotel Industry’s ESG Ratings by Private ESG Data Providers

by Seochan Jeon

Provenance of the research:

• Title of thesis/research question: Heterogeneity and Interpretability of the Global Hotel Industry’s ESG Ratings by Private ESG Data Providers
• Type of thesis: Undergraduate
• University affiliation: University of Bristol (Bristol, United Kingdom)
• Research timeframe: September 2022 – September 2023

1. Abstract/Summary:

This dissertation scrutinises the escalating global climate risks and their repercussions for businesses, emphasising the instrumental role of the Environmental, Social, and Governance (ESG) framework in fostering responsible investment (RI). The observed surge in ESG rating metrics introduces discrepancies attributable to divergences in scopes, measurement methodologies, and weights. Focusing on the environmental pillar, multiple regression analysis is applied to investigate disparagements among ten global hotel brands rated by Refinitiv, Bloomberg, and S&P Global.

Results reveal substantial correlations and coefficients of determination (R²), with environmental pillar ratings displaying correlations of 0.77 and an R² value of 0.59, which is higher than correlations among total ESG ratings (with correlations of 0.63 and R² of 0.39). This study confirms the commonality in types of ESG reporting frameworks adopted by the hotel corporations, including the Carbon Disclosure Project (CDP), Sustainability Accounting Standards Board (SASB), Global Reporting Initiative (GRI), and Taskforce on Climate-related Financial Disclosures (TCFD) as well as measurement framework of Greenhouse Gas Protocol. Such a trend may contribute to the higher correlations of environmental ratings. However, the findings underscore the profound impact of variations in assessment categories and weighting on environmental ratings between three data providers. 

Furthermore, the dissertation delves into the interpretability of ESG ratings from a public perspective, elucidating challenges in verification due to restricted public access and substantial costs for comprehensive data. The study evaluates verifiability and comparability using online public resources, shedding light on the accessibility and reliability of ESG information. A meticulous examination of hotels’ environmental performance and corresponding ESG sub-issue scores by Bloomberg unveils yearly correlations, challenging the prevailing belief that environmental scores correlate with positive impacts. This outcome suggests a potential ESG rating bias favouring larger companies with more resources to disclose non-financial information. This raises concerns regarding the impediment to effectively identifying businesses prepared for global risks and climate change mitigation. 

Lastly, the lack of public accessibility to complete rating methodologies and ESG raw data is a major limitation of this study, which also demonstrates that it lowers the public’s capacity to verify the authenticity of the ratings.

2. What were the most important or surprising findings of your work?

I could suggest several important findings of my undergraduate research:

• ESG ratings by different private raters exhibit lower correlation, primarily stemming from differences in scopes, measurement methodologies, and weighting.

• Environmental pillar ratings demonstrate higher correlation among themselves compared to the total ESG ratings (overall ratings that encompass all E, S, G scores of a firm) with commonality of reporting framework usages.

• Major ESG ratings do not always reflect the common perception of ‘sustainability’. There could be influenced by biases such as such as rater effect (where a good rating in one pillar [within E, S, G pillars] affects a positive assessment of another) and company size bias where larger companies tend to excel in ESG disclosure, thus acquiring better ESG ratings (if the rating is disclosure-oriented, which is difficult to find out).

• The discrepancy in correlations between private data providers, acknowledged biases, and the absence of public access to rating methodologies and raw data collectively impede the verifiability of ratings. This limitation hinders the ability to ascertain if a rating methodology aligns with climate mitigation goals.

3. What did you struggle with during the research and/or writing process, and how did you overcome these issues?

I faced challenges in obtaining ESG ratings for hotel brands and encountered difficulties in organising and visualising both the data and its analyses. A significant portion of company ratings is privately held, accessible only through data providers’ platforms. It took some time to establish communications with the university and secure access to this private data. The research incorporated ESG ratings from ten hotel brands provided by over three data providers, along with environmental performance data sourced from the hotels’ publicly available sustainability reports. The process of organizing and analysing substantial amounts of data was cumbersome, requiring meticulous attention to prevent errors.

4. What are you doing now and what are your plans for the coming year?

I graduated last autumn and am currently seeking opportunities in the areas directly related to my research focus, which includes corporate sustainability, climate policy, and sustainable finance. I have been actively participating in voluntary research roles and undertaken online courses to enhance my skills and deepen my understanding of climate policy and corporate sustainability regulations.

5. Following the above, did your research impact those plans in any way?

Definitely! It broadened my perspective on corporate sustainability, providing insights into areas where firms can enhance their ethical and sustainable practices aligned with global Net Zero goals considering current public policy and societal trends. I am enthusiastic about entering this field and contributing to positive impacts in these domains. Lastly, I have been able to approach firms’ sustainability stewardship more critically, evaluating the verifiability of their claims regarding sustainable activities and annual environmental costs, for instance.

6. Do you have any advice for people who are undertaking this type of resarch?

If you plan to take on empirical-based research on sustainability or climate policy, I recommend conducting comprehensive primary research on current trends and relevant academic papers. Also, a strong foundation in statistical and numerical knowledge is crucial, along with becoming comfortable with using data analysis software such as R, Excel, or Python.

Author Bio: Seochan is a geography graduate of the University of Bristol pursuing career in corporate sustainability and public policy. His enthusiasm lies in influencing current ESG regulations and international climate policies. In 2022, he attended as a Delegate of South Korea in the 17^th UN Climate Change Conference of Youth in 2022 in Egypt and in 2021, he attended COP26 in Glasgow, UK as a student delegate.