ESG ratings are widely used benchmarks but often diverge across providers. We identify the comparative industry effect—differences in how raters classify industries and construct peer groups for relative evaluation—as a key, overlooked driver of this divergence. Using variance decomposition and simulation analyses, we show that this effect explains 30% of industry-level differences in ESG scores, comparable in magnitude to measurement-based discrepancies. Divergence is especially pronounced for private and complex-ownership firms, where limited disclosure prompts greater reliance on industry benchmarks. Improving ESG comparability thus requires not only measurement standardization but also harmonization in industry classification and peer group construction.
