Determining the underlying role of corporate sustainability criteria in a ranking problem using UW-TOPSIS

Abstract

AbstractESG criteria are becoming increasingly important for institutional and retail investors with a consequent growing demand of reliable and transparent ESG data to support their decisions. Several ESG rating agencies assess companies providing ratings and rankings. However, their rating methodologies are subject to some criticisms. One of the main weaknesses is the determination of the relative importance of the ESG criteria involved in the rating process. In this work, we propose the use of a MCDM rating and ranking approach with which the decision maker can rank firms based on their ESG global performance without the elicitation of aggregation weights. The approach, UW-TOPSIS, provides three outputs: the global ESG rating of the firms, a ranking based on the ratings and, for each alternative, a vector of weights describing the discriminatory power of the ESG criteria on the alternative, thus overcoming one of the criticisms to the methodologies of ESG rating agencies. However, UW-TOPSIS has a limitation as it does not provide a global vector of weights valid for all the alternatives in the ranking, expressing the overall role or contribution of each criteria to the componsition of the ranking. The acknowledge and analysis of this situation and the proposal of a solution, is the main objective of this paper.