Lesson Overview
What are ESG ratings really measuring?
ESG ratings can create confusion because they are often treated as a simple judgement on whether a company is good or bad. In practice, many ratings are focused on financial materiality.
This lesson looks at what ESG ratings are, what they are not and why clear communication matters when companies and investment firms refer to them.
In this lesson, we explore:
- What ESG ratings are designed to measure
- Why financial materiality is central to many ESG ratings
- How an oil company can receive a high ESG rating under a relative framework
- Why ESG ratings should not be confused with a company’s external impact
- A real-world example of how one ESG ratings provider explains its approach
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A practical look at ESG ratings and the importance of knowing what they do and do not measure.
Vincent McCarthy, CFA
Founder, Responsible Investment Institute®