What is ESG Scoring and who is measuring this performance?
ESG ratings help investors assess financial risks and opportunities related to sustainability, from regulatory developments to reputational challenges.Joaska MischkeHead of ESG and sustainability strategy
What is ESG scoring, and why does it matter?
How do you measure sustainability in a way that’s clear, comparable, and actionable? A company may highlight a recent environmental initiative or publish a detailed sustainability report, but investors and stakeholders need a standardised way to assess long-term risks and opportunities.
This is where Environmental, Social, and Governance (ESG) scores come in. ESG ratings help investors assess financial risks and opportunities related to sustainability, from regulatory developments to reputational challenges. But ESG ratings aren’t just for investors—when used effectively, they support risk management, operational improvements, and long-term business resilience, while also providing leaders and boards with a high-level ESG dashboard for tracking progress.
However, ESG ratings are not without challenges. Different agencies use varying methodologies, which can sometimes lead to inconsistent scores for the same company. Businesses may find scoring criteria unclear, while investors can struggle to compare ratings across different providers.
To improve transparency and consistency, the European Union has proposed an ESG rating regulation, expected to take effect in 2026¹. If adopted, it will require greater disclosure from rating agencies, including clearer explanations of methodologies, data sources, and weighting criteria. This initiative aims to make ESG ratings more reliable and comparable for companies and investors alike.
How do ESG ratings work?
At their core, ESG ratings evaluate a company’s sustainability performance across three key areas:
Social – Labour conditions, diversity and inclusion, and community engagement.
Governance – Executive pay, board independence, and business ethics.
While this framework seems straightforward, ESG rating methodologies vary, which can lead to differences in scores:
A company may receive significantly different ESG ratings depending on the provider.
Some agencies rely primarily on company-reported data, while others incorporate media reports, regulatory filings, and third-party research.
ESG factors are weighted differently—one agency may emphasise environmental risks, while another prioritises governance.
This variation highlights why understanding ESG rating methodologies is crucial for businesses and investors alike.
Who provides ESG ratings?
Several firms provide ESG ratings, but a few key players dominate the market, including MSCI, Sustainalytics, and S&P Global.
MSCI ESG Ratings.
MSCI assesses a company’s exposure to financially material ESG risks and how well it manages those risks relative to industry peers. Using a rules-based methodology, MSCI ranks companies as leaders, average, or laggards based on risk management effectiveness. MSCI’s ESG ratings incorporate climate risk analysis, including assessments aligned with the 1.5°C climate goal. This enables investors to evaluate whether a company’s climate strategy aligns with global net-zero targets.
Widely used by investors, asset managers, and financial institutions, MSCI ratings support portfolio construction, ESG benchmarking, and index-based investment strategies. Companies are monitored continuously and reviewed annually, offering opportunities to improve scores through better risk management and transparency.
Sustainalytics ESG Risk Ratings.
Morningstar Sustainalytics’ ESG Risk Ratings measure a company’s exposure to material ESG risks and whether those risks are managed or remain unmanaged. The ratings result in a single ESG risk score, categorising companies into negligible, low, medium, high, or severe risk levels. Sustainalytics also considers the feasibility of risk mitigation strategies based on available technology. If solutions exist but a company has not implemented them (e.g., a manufacturer delaying the transition to cleaner energy sources), it may be assigned a higher risk score. Conversely, industries where viable alternatives are not yet commercially available, such as airlines transitioning away from fossil fuels, may have lower risk exposure due to limited mitigation options.
These ratings focus on financially material ESG issues, providing detailed governance insights and enabling cross-industry comparisons. Investors, corporations, and banks use Sustainalytics’ ratings to assess ESG risks at the security and portfolio level, helping improve long-term investment performance.
Company ratings are updated annually, with businesses able to submit new ESG disclosures to reflect sustainability improvements.
S&P Global ESG Scores.
With its strong credit rating background, S&P Global provides ESG assessments that help investors evaluate how sustainability factors impact financial risk and creditworthiness. Unlike MSCI and Sustainalytics, S&P integrates ESG into broader financial risk analysis, making it particularly useful for assessing portfolio companies and debt issuers.
In 2023, S&P shifted from numeric ESG scores to qualitative assessments, offering a comprehensive evaluation of a company’s ESG performance. Through its Corporate Sustainability Assessment (CSA), S&P examines material ESG risks, opportunities, and financial impacts, using public disclosures, media analysis, and stakeholder input to benchmark companies against industry peers.
S&P’s ESG insights support investors in understanding credit risks, evaluating fund exposure, and engaging with portfolio companies on sustainability-related financial risks.
Because each agency evaluates companies differently, businesses must understand the methodology behind their scores to interpret and respond effectively.
The future of ESG ratings.
ESG ratings are evolving. AI and big data will enhance assessments, offering real-time insights into risks and opportunities, while greater regulatory oversight aims to improve credibility and transparency.
When used effectively, ESG ratings can serve as powerful tools, helping businesses enhance risk management, optimise operations, and build long-term resilience. The upcoming EU ESG rating regulation underscores their importance and the value they can provide. While the regulation is expected to bring greater transparency and consistency, financial markets show that even in regulated industries, multiple rating methodologies can coexist—as seen with credit rating agencies.
As ESG rating methodologies evolve, companies that have focused on short-term rating improvements may need to adapt to stricter disclosure expectations. This shift reinforces the need to use ESG ratings strategically—not just as a reporting metric, but as a tool for driving long-term sustainability performance.
Ultimately, ESG ratings will remain a critical tool in sustainable finance, but their true value depends on how they are applied and interpreted. Companies that prioritise transparency, integrate ESG into business strategy, and focus on long-term performance will be best positioned to improve sustainability outcomes and strengthen credibility—with better scores following as a result.
Author:Joaska Mischke, Head of ESG and sustainability strategy, Simply Sustainable
Joaska leads strategic initiatives for our clients and embeds sustainability into organisations within an ever-evolving business landscape. As a specialist in sustainability, materiality, and transformation, Joaska excels at developing and integrating complete ESG and sustainability strategies. She has also successfully led numerous CSRD-aligned double materiality projects, both as part of broader strategies and standalone efforts. Her expertise in incorporating CSRD requirements into business processes ensures value creation beyond compliance.
Joaska attended the London School of Economics and Political Science (LSE) where she obtained an MSc in Management, Organisations and Governance. She also holds diplomas in Design Thinking from IDEO, Business Sustainability Management from the University of Cambridge and Sustainable Business Strategy from Harvard Business School. She is a registered Associate at the Institute of Environment Management and Assessment (IEMA) and is a GRI-certified sustainability professional.
