Corporate Sustainability Performance : Introducing an SDG Score and Testing Its Validity Relative to ESG Ratings

Although sustainable investing is becoming a mainstream ambition, investors disagree on how to best measure corporate sustainability performance (CSP). Environmental, Social, and Governance (ESG) ratings are the dominant CSP metric in the market, but they focus on financial materiality rather than sustainability impact. In this paper we introduce a novel alternative CSP metric that measures companies’ impact on the Sustainable Development Goals (SDGs). We then develop three tests to gauge the construct validity of this SDG score and assess if it enjoys discriminant validity relative to ESG ratings of four providers. We find that, unlike ESG ratings, the SDG score: (i) captures investors’ revealed sustainability preferences; (ii) aligns with the emerging EU taxonomy; and (iii) contributes to climate change mitigation ambitions. We conclude that as a CSP metric the SDG score has high, and ESG ratings low, construct validity. We caution against using concepts like ESG, sustainability, and impact interchangeably