ESG ratings are scores that independent agencies assign to publicly traded companies based on how well those companies manage environmental, social, and governance risks. Providers like MSCI, S&P Global, LSEG, and Sustainalytics each run their own proprietary models, so the same company can receive noticeably different ratings depending on who does the analysis. Investors use these ratings to screen holdings, compare companies within an industry, and gauge long-term risk exposure.
What the Three Letters Measure
Every rating is built on three broad categories, evaluated separately and then combined into an overall score. The weight each carries in the final rating depends on the company’s industry, location, and business model.
The environmental pillar measures how a company interacts with the natural world. Common metrics include carbon emissions, water usage, waste practices, and energy efficiency. Rating agencies typically break carbon output into the three categories set by the GHG Protocol: Scope 1 covers direct emissions from sources a company owns or controls, Scope 2 covers indirect emissions from purchased electricity and energy, and Scope 3 covers all other indirect emissions across the supply chain, upstream and downstream.1GHG Protocol. FAQ
The social pillar looks at how a company treats employees, manages supplier relationships, and engages with communities. Analysts examine workplace safety records, pay practices, hiring and promotion equity, and labor conditions in the supply chain. In the U.S., large private employers with 100 or more workers must submit annual workforce demographic data to the Equal Employment Opportunity Commission, broken down by job category, sex, and race or ethnicity, and rating agencies can draw on this when assessing diversity practices.2U.S. Equal Employment Opportunity Commission. EEO Data Collections Supply chain audits also feed in, covering forced labor prevention, responsible recruitment, and worker safety at supplier facilities.
The governance pillar examines how a company is led and held accountable. Key factors include board composition and independence, executive pay relative to performance and shareholder approval, anti-corruption policies, and protection of shareholder voting rights. Data privacy and cybersecurity oversight now sit within governance scoring as well: analysts want to see board-level responsibility for cyber risk, clear data protection policies, and incident response plans.
How a Score Actually Gets Built
Turning raw disclosures into a single ESG grade takes several layers of work. The details of each model are proprietary, but the general process follows a common shape.
Where the Data Comes From
Companies provide the foundation through annual reports such as SEC Form 10-K filings, proxy statements, and voluntary sustainability reports. Nearly all large firms now include human capital disclosures in their 10-K filings, and a growing number reference specific sustainability reporting frameworks in their proxy statements.
Government databases offer an independent check on those disclosures. The Environmental Protection Agency maintains public enforcement and compliance records covering hundreds of thousands of regulated facilities under the Clean Air Act, Clean Water Act, and other environmental statutes.3US EPA. Enforcement Data and Results The Department of Labor publishes searchable enforcement data on workplace violations and penalties. News reports and outside investigations are also reviewed to catch controversies that corporate disclosures might not mention.
Not all of this data stays current at the same pace. MSCI updates the underlying scores that feed its ratings weekly, covering areas like governance metrics and controversy assessments, but a full analytical review of each company’s overall rating typically happens only once a year.4MSCI. ESG Ratings Process Other providers follow different schedules and sometimes revise their metrics over time, which can create inconsistencies when comparing scores across years. Check when a rating was last updated before relying on it.
Materiality and Industry Weighting
The most important concept in ESG scoring is materiality: the idea that not every ESG factor matters equally for every company. An airline’s fuel efficiency is a highly material environmental metric; the same metric is nearly meaningless for an investment bank. Rating agencies adjust their weighting accordingly. The Sustainability Accounting Standards Board (SASB), now part of the IFRS Foundation, publishes industry-specific standards across 77 distinct industries identifying which sustainability topics are financially material for each one.
For roughly two-thirds of large-cap companies, fewer than 25 percent of the data points in a broad ESG score are considered material to that company’s specific industry. Which factors get amplified and which get muted has an outsized influence on the final grade.
There is also a growing split in how materiality itself is defined. The traditional approach used by most U.S.-focused rating providers is financial materiality: an outside-in view that asks whether ESG factors could create financial risk or opportunity for the company. The European Union’s Corporate Sustainability Reporting Directive (CSRD) requires a broader concept called double materiality, which adds an inside-out view of whether the company’s operations cause meaningful harm or benefit to people and the environment, regardless of whether that impact reaches the balance sheet. Under CSRD, a topic requires disclosure if it is material from either perspective.
Adjustments and Penalties
Beyond industry weighting, agencies factor in where a company operates and the regulatory environment it faces. Firms in jurisdictions with weaker environmental or labor protections may face additional scrutiny. Penalties get applied for documented legal infractions: regulatory fines, enforcement actions, or settled lawsuits can drag a score down even when the company’s stated policies look strong.
The Scoring Scales
Final grades usually take one of two formats. MSCI assigns ratings on a seven-level letter scale from AAA (highest) to CCC (lowest), similar to traditional credit ratings, and evaluates companies against peers in the same industry.5MSCI. ESG Ratings Methodology S&P Global uses a numerical scale from 0 to 100, with higher numbers reflecting stronger ESG performance, and integrates this data into its broader credit and market analysis tools.6S&P Global. ESG Scores and Raw Data LSEG (formerly Refinitiv) also runs a 0-to-100 scale, and a score above 75 indicates excellent relative ESG performance and a high degree of public reporting transparency.7LSEG. ESG Scores Sustainalytics (Morningstar) inverts the logic: it measures the level of ESG risk a company has not yet managed, so scores start at zero and rise as unmanaged risk grows. A lower Sustainalytics number is better.
Why the Same Company Gets Different Ratings
Rating disagreement is the biggest source of confusion for anyone looking up an ESG score. Research analyzing five major rating agencies found their ESG scores for the same companies correlated at an average of just 0.61, far below the 0.99 correlation between traditional credit ratings from agencies like Moody’s and S&P. Environmental scores showed slightly higher agreement, but the overall picture is one of significant divergence.
That divergence comes from three main sources:
- Measurement differences. Two agencies may evaluate the same factor, say labor practices, using completely different indicators. One might track workforce turnover; the other counts labor-related lawsuits. This accounts for roughly half of all rating disagreements.
- Scope differences. One agency may include corporate lobbying activity in its assessment while another leaves it out entirely. Decisions about what to measure explain about a third of divergence.
- Weight differences. Even when two agencies measure the same factors, they may assign different levels of importance to each. This explains a smaller but still meaningful share of disagreements.
The practical takeaway: a single ESG rating from one provider does not tell the whole story. Comparing ratings across agencies, or looking at the underlying component scores rather than just the headline grade, gives a more reliable picture.
What ESG Ratings Do for Companies and Investors
Ratings carry tangible financial consequences. A four-year study of companies in the MSCI World Index found that firms in the highest ESG-rated group had an average cost of capital of 6.16 percent, compared with 6.55 percent for the lowest-rated group. The pattern held for both debt and equity costs across developed and emerging markets, and companies whose ratings improved also saw borrowing costs fall over time.8MSCI. ESG and the Cost of Capital
On the lending side, that relationship has fueled the growth of ESG-linked loans, where lenders tie borrowing terms to a company meeting specified ESG targets. Hit the targets and the interest rate drops; miss them and the rate can rise. For investors, ratings serve as a screening tool: many index funds and institutional portfolios use them to filter out companies below a certain threshold or to tilt holdings toward higher-rated firms.
The Limits of an ESG Rating
Beyond the divergence problem, ESG ratings face several recurring criticisms worth understanding before you use one.
The most fundamental is that much of the underlying data is self-reported. Agencies cross-check against government databases and news reports, but information about supply chain practices and internal governance often comes from the companies themselves with limited independent verification.
Materiality frameworks also draw scrutiny. Because providers define and weight materiality differently, two agencies can look at the same company, agree on the raw facts, and still produce conflicting ratings because they disagree on which facts matter most. For anyone comparing ESG-screened funds, that makes it hard to know exactly what standards a given fund applies.
The rapid growth of ESG-linked products has also raised greenwashing concerns. In 2024, the SEC charged Invesco Advisers with misleading clients about the percentage of its assets that were “ESG integrated” and imposed a $17.5 million civil penalty. The agency found that Invesco had counted passive ETFs that did not actually consider ESG factors when calculating its integration claims.9U.S. Securities and Exchange Commission. SEC Charges Invesco Advisers for Making Misleading Statements
The Regulatory Backdrop
Disclosure rules that feed rating agencies are moving in different directions depending on jurisdiction. The SEC adopted a climate-related disclosure rule in March 2024 that would have required public companies to report greenhouse gas emissions and climate-related financial risks in their annual filings.10U.S. Securities and Exchange Commission. Enhancement and Standardization of Climate-Related Disclosures The SEC stayed the rule pending litigation, and as of late 2025 it remains on hold. Individual U.S. states have moved in both directions on ESG investing practices, adding another layer of uncertainty for funds that use ratings.
Outside the United States, disclosure requirements are advancing faster. The International Sustainability Standards Board published its first two standards, IFRS S1 (general sustainability disclosures) and IFRS S2 (climate-related disclosures), which took effect for annual reporting periods beginning on or after January 1, 2024.11IFRS Foundation. IFRS S2 Climate-Related Disclosures The EU’s CSRD applies the double materiality lens described above, with the largest EU-listed companies reporting for the 2024 financial year. The EU has postponed the timeline for later waves originally scheduled to begin reporting for the 2025 and 2026 financial years.12European Commission. Corporate Sustainability Reporting Because U.S. disclosure requirements have not caught up, the quality and comparability of the raw data feeding U.S. ESG ratings remain uneven, which is part of why methodology and materiality choices carry so much weight in the final score.