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ESG Ratings and Their Disagreements

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ESG Ratings and Their Disagreements

When Standard & Poor's assigns a credit rating of BBB to a bond, every major agency using similar methodology will reach a broadly comparable conclusion. When MSCI assigns an ESG rating of AA to a company, Sustainalytics might call the same company high-risk — the rough equivalent of a junk-bond status. This is not a rounding error. The correlation between major ESG raters' scores for the same companies hovers around 0.5, a level of disagreement that would be scandalous in credit markets and that has profound implications for any investor relying on ESG data.

Why Disagreement Is Structural​

The disagreement is not caused by one provider being right and others wrong. It reflects three deep structural differences: what raters choose to measure (scope), how they weight different factors (weights), and what data sources they use to make assessments (measurement approach).

On scope, some providers focus on a company's impact on society and environment — what the EU calls "outside-in" materiality. Others focus on how ESG risks affect the company's own financial performance — "inside-out" materiality. A coal producer looks radically different under these two lenses. Under the first, it is rated poorly because of its contribution to climate change. Under the second, it may receive a moderate rating if it manages its regulatory and physical risks competently.

On weights, a technology company that scores well on carbon emissions (the E) but poorly on data privacy and workforce diversity (S and G) will receive a very different aggregate score depending on whether the rater weights E heavily or treats the three letters equally. Raters rarely disclose their weighting methodologies in detail, making it impossible for investors to fully reverse-engineer a score.

On measurement, some ESG factors can be quantified from public disclosures. Others rely on questionnaires sent to companies — which creates an obvious self-reporting bias, since companies control what they submit and how they frame it. A 2022 study by Berg, Kölbel, and Rigobon, published in the Review of Finance, decomposed ESG rating disagreements and found that divergence in measurement methodology accounted for the largest share of variation, larger even than scope or weighting differences.

What Investors Should Do​

No single ESG rating is authoritative. The most sophisticated institutional investors treat ESG scores the way equity analysts treat broker earnings estimates: as useful inputs that require triangulation across multiple sources, not verdicts to be accepted uncritically. Chapters in this section walk through each major provider's methodology, their respective blind spots, and strategies for reconciling conflicting signals in a real investment process.

Articles in this chapter​