How hard is it to make ethical financial decisions? Roberto Rigobon PhD ’97, the Society of Sloan Fellows Professor of Management at MIT, offers an example. Say you want to support animal rights. Should you buy vegan clothes? They’re often made of plastic, which may end up in a landfill or the ocean. So, he asks: “How many seals do you want to kill to save one sheep?”

Rigobon’s work bluntly tackles exactly these kinds of thorny ethical questions. Societally, we measure importance poorly, he explains, making decisions as if the world were made of single issues. Rigobon describes himself as obsessed with measuring options more effectively and incentivizing different behaviors earlier. Such work is essential for addressing a time-sensitive crisis like global warming, he says, and it is at the heart of the Aggregate Confusion Project.

Launched in September 2020, led by the MIT Sloan Sustainability Initiative, and headed by Rigobon, the Aggregate Confusion Project aims to help investors practice responsible investing more effectively by working with environmental, social, and governance (ESG) data. Aggregated by various rating agencies, ESG data are intended to help investors put money toward more ethical companies. However, project research has shown that ESG ratings diverge broadly, varying not only in what categories of data they consider (such as carbon emissions or labor practices) but also in the weight they give different kinds of data. In one recent study, the researchers found 64 measurable attributes varied among ESG rating providers.

“If you’re a company and you have 64 different categories in which you might improve, which are the ones you prioritize? The ones that are easier, not necessarily the ones that are impactful,” Rigobon explains.

Seeking reliable measurement

Even with agencies working hard to obtain accurate, real-time data, there’s a lot of noise, and agencies try to set their data apart from competitors. The Aggregate Confusion Project intends to present information in a standardized way so that it’s easier to understand and utilize.

Jason Jay PhD ’10, senior lecturer and director of the MIT Sloan Sustainability Initiative, says, “There’s exponential growth in assets under management that are trying to incorporate ESG considerations, particularly climate-change risks and opportunities. This trend is like a skyscraper we’re building as fast as possible, and it’s a good vision—capital markets internalizing social and environmental risks and incentivizing good behavior. But this edifice stands on a shaky foundation, filled with cracks and holes, which is the quality of measurement.

“The Aggregate Confusion Project is working to fix some of those cracks and holes by creating more reliable measurement, not just in climate change but in a suite of essential issues that include women’s empowerment, racial justice, corruption, labor standards, and human trafficking.”

While demand for responsible investing options has grown, there’s debate about what strategies actually drive climate-friendly results. Should investors divest from carbon-intensive companies, prioritize carbon-efficient companies, or use shareholder power to force companies to change?

Rigobon believes the latter option will produce the fastest results. “We need to get our hands dirty,”  he says. “We want to measure the consequences of companies’ actions and say, ‘Here is evidence of your damage. Let’s fix it.’ And the financial system will be able to say, ‘Actions A, B, and C are unacceptable.’” According to Rigobon, changing the behaviors of just three to five of the nation’s biggest polluters would make a huge difference.

That’s why it’s so important to establish clear criteria for judging corporate behavior, Rigobon says. Already, the Aggregate Confusion Project has a working paper titled “Aggregate Confusion: The Divergence of ESG Ratings”; two more papers are on the way to assess the portfolio consequences of divergent ratings and to provide recommendations to regulators.

“Keep in mind that ESG rating is still a young field, and the definition of sustainability is by nature a fluid one,” says Aggregate Confusion Project postdoctoral research fellow Florian Berg. “What’s important today might not be important tomorrow.”

The team has also developed a web-based game, ESG Machine, that measures how participants allocate resources and make trade-offs. For example, a player might be given $100 and asked to choose between supporting women’s empowerment, environmental protection, or social justice charities. Nearly 1,000 people have participated so far, providing data that will help researchers learn how societal values change over time.

Real-world impact

Although still relatively new, the Aggregate Confusion Project is already working with a consortium of financial leaders that will help it set standards and push for increased transparency and consistency. A founding member is Massachusetts Pension Reserves Investment Management, which manages the $75 billion Pension Reserves Investment Trust Fund that’s made up of several public retirement systems in the state.

The project is currently seeking further corporate member participation, and Rigobon encourages interested parties to sign up for the Sustainability Initiative newsletter. He’s also working to educate students on additional subjects related to corporate responsibility, such as human trafficking. “The only way to solve these problems is to create an army of able individuals who are willing to tackle important questions. It’s a thankless job, but that spells MIT—multidisciplinary, important, and thankless.”

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