Investor Bias in ESG Ratings: Implications for Sustainable Portfolios

Lukács, Bence and Tóth, Árpád (2025) Investor Bias in ESG Ratings: Implications for Sustainable Portfolios. ECOCYCLES, 11 (2). pp. 67-77. ISSN 2416-2140

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Abstract

ESG ratings are crucial tools that align financial strategies with the purpose of sustainability. Their reliability is often undermined because biases distort their comparability and dependability. The present study offers a novel contribution to the multidimensional analysis of biases in ESG ratings. Focusing on methodological inconsistencies, like firm size disparities, media influence, and self-disclosure practices. The unique contribution is integrating a behavioural finance perspective, considering psychological biases related to confirmation, overconfidence and herding behaviour factors that affect investor interpretation of ESG scores. This study synthesizes literature from diverse sources to identify the combined effects of these biases on capital allocation, market dynamics, and sustainable investment outcomes. It is a call for standardized ESG rating methodologies, increased transparency, and heightened awareness in practice to overcome these biases effectively. The actionable insights provided will help policymakers, rating agencies, and investors to create a more equitable and trustworthy ESG evaluation frameworks.

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