ESG Ratings: As Misunderstood as ESG Itself
This lesson cuts through the confusion to explain what ESG ratings are really measuring, why differences exist between providers, and how financial risk — not external impact — drives the process.
Lesson Overview
In this lesson, we cut through the confusion and frustration surrounding ESG ratings — focusing on what they are, what they are not, and why understanding their purpose matters. We explore:
- 📌 What ESG ratings are really designed to measure — the focus on financial materiality
- 📌 The relative standard — how an oil company can receive a high ESG rating
- 📌 Why ESG ratings should not be confused with assessments of a company's external impact
- 📌 A real-world example — a look at one ESG ratings provider and the purpose of their ratings
Understanding ESG ratings is essential to making better decisions — being clear on what they do and do not measure. Clear and authentic communication is critical when companies and investment firms talk about ESG ratings.
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— Vincent McCarthy, CFA
Founder, Responsible Investment Institute®