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 such as MSCI, S&P Global, LSEG, and Sustainalytics each run their own proprietary models, which is why the same company can receive noticeably different scores depending on who did the analysis. Investors use the ratings to screen holdings, compare companies within an industry, and gauge long-term risk.
What the Three Pillars Actually Measure
Every ESG rating rests on three categories. Agencies score each one separately and then combine them, with the weight of each pillar shifting according to the company’s industry, location, and business model.
Environmental
This pillar covers how a company interacts with the natural world: carbon emissions, water use, waste, and energy efficiency. Agencies typically break carbon output into the three scopes defined by the GHG Protocol. Scope 1 is direct emissions from sources the company owns or controls. Scope 2 is indirect emissions from purchased electricity and energy. Scope 3 is everything else, both upstream and downstream in the supply chain.1GHG Protocol. FAQ Performance here signals how well a business model can hold up as regulation tightens and resources get scarcer.
Social
The social pillar looks at how a company treats employees, manages suppliers, and engages with communities. Analysts review workplace safety, pay practices, hiring and promotion equity, and labor conditions down the supply chain. In the United States, large private employers must file annual workforce demographic data with the EEOC, and agencies can draw on that record when assessing diversity practices.2U.S. Equal Employment Opportunity Commission. EEO Data Collections Supplier audits covering forced labor, recruitment practices, and worker health and safety also factor in.
Governance
Governance examines how a company is led and held accountable. Key items include board independence, executive pay relative to performance and shareholder approval, anti-corruption policies, and shareholder voting rights. Data privacy and cybersecurity oversight have become part of governance scoring too. Analysts look at whether a board actually owns cyber risk, whether data protection policies exist, and whether there is an incident response plan.
Who Issues ESG Ratings and How to Read Their Scales
A handful of agencies dominate the market, and each uses its own scale. Knowing the scale matters, because a “high” number from one provider can mean the opposite of a “high” number from another.
- MSCI assigns a seven-level letter grade from AAA (highest) to CCC (lowest), similar to a credit rating, and evaluates companies against industry peers.3MSCI. ESG Ratings Methodology
- S&P Global uses a 0-to-100 numerical scale, with higher scores reflecting stronger ESG performance, and integrates the data into its broader credit and market tools.4S&P Global. ESG Scores and Raw Data
- LSEG (formerly Refinitiv) also uses a 0-to-100 scale. A score above 75 indicates excellent relative ESG performance and a high degree of public reporting transparency.5LSEG. ESG Scores
- Sustainalytics (Morningstar) measures the ESG risk a company has not yet managed. Scores begin at zero and rise as unmanaged risk rises, so lower is better. That is the reverse of most other providers.
How a Rating Gets Built
Converting raw data into a final score runs through several steps. The proprietary details stay guarded, but the general shape is consistent across providers.
Where the Data Comes From
Companies supply the foundation through annual reports (SEC Form 10-K filings), proxy statements, and voluntary sustainability reports. Human capital disclosures now appear in nearly all large-company 10-Ks, and a growing number of proxy statements reference specific sustainability frameworks.
Government databases provide an independent check. The EPA 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.6US EPA. Enforcement Data and Results The Department of Labor publishes searchable records of workplace violations and penalties. Agencies also scan news reports and outside investigations to catch controversies and lawsuits a company may not have volunteered.
Materiality and Industry Weighting
The most important lever in the whole process is materiality. Not every ESG factor matters equally to every company. Fuel efficiency is highly material for an airline and nearly meaningless for an investment bank. Agencies adjust their weights accordingly. The Sustainability Accounting Standards Board, now part of the IFRS Foundation, publishes industry-specific standards that identify which sustainability topics are financially material by sector.
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. The weighting decisions, in other words, carry outsized influence over the final grade.
Financial Materiality vs. Double Materiality
Providers also differ on what “material” means. Most U.S.-focused agencies apply financial materiality, an outside-in view asking whether an ESG factor could create a financial risk or opportunity. The European Union’s Corporate Sustainability Reporting Directive requires double materiality, which adds an inside-out view of whether a company’s operations cause meaningful harm or benefit to people and the environment, regardless of whether that impact hits the balance sheet. Under CSRD, a topic must be disclosed if it is material from either perspective.
Penalties and Country Adjustments
Agencies also account for where a company operates and what regulatory environment it faces. Companies based in jurisdictions with weaker environmental or labor protections may draw additional scrutiny. Documented infractions bring penalties: regulatory fines, enforcement actions, and settled lawsuits can drag a score down even when written policies look strong.
How Current the Rating Is
Not every rating reflects fresh information. MSCI updates underlying data scores weekly, covering areas like governance metrics and controversies, but a full analytical review of a company’s overall rating typically happens only once a year.7MSCI. ESG Ratings Process Other providers run on their own schedules and periodically revise their metrics, which can make year-over-year comparisons uneven. If a rating is driving a decision, check when it was last updated.
Why the Same Company Gets Different Ratings
Rating divergence is the most consistent criticism of ESG scores, and it is real. Research across five major agencies found that their ESG scores for the same companies correlated at an average of just 0.61. Traditional credit ratings from agencies like Moody’s and S&P correlate at 0.99. Environmental scores agree slightly better than social or governance scores, but the overall picture is wide disagreement.
Three sources explain most of it:
- Measurement differences. Two agencies may evaluate the same factor using different indicators. One tracks workforce turnover; another counts labor-related lawsuits. This drives roughly half of the disagreement.
- Scope differences. One agency may include corporate lobbying activity; another leaves it out entirely. Decisions about what to measure explain about a third of the gap.
- Weight differences. Even when agencies measure the same things, they assign different levels of importance. This accounts for a smaller but still meaningful share.
The practical consequence for anyone using ESG ratings: a single provider’s score does not tell the whole story. Comparing ratings across agencies, or looking at the underlying component scores rather than the headline grade, gives a more reliable read.
What ESG Ratings Actually Do
Ratings have real financial consequences. A four-year study of MSCI World Index companies 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 across debt and equity in both developed and emerging markets, and low-rated companies that improved their scores saw borrowing costs fall over time.8MSCI. ESG and the Cost of Capital
This relationship has driven the growth of ESG-linked loans, where lenders tie borrowing terms to the company meeting specified ESG targets. Hit the targets, the interest rate drops. Miss them, and the rate can go up. On the investor side, ratings act as a screen. Many index funds and institutional portfolios use them to exclude companies below a threshold or to tilt holdings toward higher-rated firms.
Where the Regulations Stand
Rules on ESG disclosure are moving quickly, and the direction depends on jurisdiction.
In the United States, 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.9U.S. Securities and Exchange Commission. Enhancement and Standardization of Climate-Related Disclosures The rule faced immediate legal challenges, the SEC itself stayed it pending litigation, and as of late 2025 the Eighth Circuit placed the case in abeyance. The rule is on hold. If implemented, it would require large companies to obtain independent assurance of their emissions disclosures.
The SEC has pursued ESG misrepresentations through enforcement. In 2024, it charged Invesco Advisers with misleading clients about the share of its assets that were “ESG integrated,” imposing a $17.5 million civil penalty after finding that Invesco had counted passive ETFs that did not actually consider ESG factors.10U.S. Securities and Exchange Commission. SEC Charges Invesco Advisers for Making Misleading Statements
Outside the U.S., disclosure requirements are advancing faster. The International Sustainability Standards Board published IFRS S1 and IFRS S2, which took effect for annual reporting periods beginning on or after January 1, 2024, and multiple jurisdictions are adopting them.11IFRS Foundation. IFRS S2 Climate-Related Disclosures The EU’s CSRD, built on double materiality, began applying to the largest EU-listed companies for the 2024 financial year, though the EU has postponed the timeline for the next waves originally scheduled for 2025 and 2026 reporting.12European Commission. Corporate Sustainability Reporting
A counter-movement has formed inside the United States. Between 2020 and 2025, 36 states enacted a combined 143 bills either opposing or supporting ESG-related investing. The opposing measures include bans on state pension funds considering ESG factors, anti-boycott laws penalizing financial firms that restrict business with industries such as fossil fuels or firearms, and disclosure requirements aimed at firms that apply ESG criteria. This political split adds another layer of uncertainty to how ratings are used in practice.
Known Weaknesses
Beyond divergence, ESG ratings face a few recurring criticisms worth knowing before relying on them.
Much of the underlying data is self-reported. Agencies cross-check against government databases and news coverage, but on topics like supply chain practices and internal governance, the inputs still come largely from the company being rated, with limited independent verification.
Materiality frameworks are another soft spot. Because providers define and weight materiality differently, two agencies can look at the same company, agree on the raw facts, and still produce conflicting scores because they disagree on which facts count. For anyone comparing ESG-screened funds, that makes it hard to know what standard a given fund is actually applying.
And the rapid growth of ESG-linked products has raised greenwashing concerns, the practice of overstating environmental or social credentials. SEC enforcement signals that regulators are watching, but the absence of a single mandatory U.S. disclosure standard means the quality and comparability of ESG data remain uneven.