ESG Scores (2024)

FAQs

How accurate are ESG scores? ›

ESG ratings are not predictive

ESG ratings don't always accurately predict the ESG risks faced by a company. Many ESG rating agencies imply that their reports can provide an indication of a company's future ESG risk, however, recent studies show that they're not reliably predictive.

Environmental, social, and governance (ESG) scores are an essential tool for investors to assess a company's sustainability and ethical performance. These scores typically range from 0 to 100, with a score of less than 50 considered relatively poor and more than 70 considered good.

The way it's measured isn't standardised

With agencies like Bloomberg and Dow Jones among others offering their own bespoke rating systems (with results that can vary significantly depending on the provider), this has opened ESG claims up to scrutiny and scepticism.

Why do ESG scores matter? Investors prefer companies with better overall ESG scores because they typically have fewer liabilities, making it easier to acquire capital and hire top talent. These companies also often have successful stakeholder relationships and a brand reputation.

Size Bias: Larger companies tend to have higher ESG scores. There are sev- eral possible explanations for this. Larger companies tend to receive greater scrutiny from investors (Burke et al. 1986), investment analysts, and the media, and as a result may feel pressured to provide greater ESG reporting and disclosures.

MSCI publishes ESG ratings on 8,500 companies (14,000 issuers) globally, and employs over 200 analysts. The data from MSCI ESG research analysts are also used to produce MSCI ESG Indexes.

One of the main disadvantages of ESG criteria is that companies are not required to disclose all information related to their sustainability practices. This can make it difficult for investors to evaluate the sustainability and ethical impact of investments.

Some opponents also believe that ESG investing is politically motivated and could lead to biased investment decisions.” In a line used by proponents, those in opposition to the ESG movement also believe there is substantial support behind them.

Why is ESG so controversial? ›

Critics portrayed ESG investing as primarily motivated by political concerns and a potential drag on returns. Additionally, some critics have raised concerns about the complexity and reliability of ESG metrics.

The SEC's recently proposed climate disclosure rules fail to satisfy these requirements. Instead, the proposed climate rules create controversy by imposing a political viewpoint, by advancing an interest group agenda at the expense of investors generally, and by redefining concepts at the core of securities regulation.

The personal ESG score assesses an individual based on three main factors: their environmental, social, and governance impacts. Many companies now believe that only individuals who prioritise corporate sustainability can be trusted with high-responsibility tasks.

Successful companies are implementing ESG strategies that increase financial, societal, and environmental impact as well as ensure long-term competitiveness.

The reality is that ESG-focused investing hasn't been great. In a 2023 review of more than a thousand research papers, US-based researchers found that sustainable investing did not outperform conventional investing.

But current ESG measurement is dangerously narrow as it fails to capture the complexity in environmental, social, and business systems. These measures lack insight into messy underlying processes — it's important to look behind the numbers and ask: how, why, and under what conditions an outcome came about.