At a Glance:
Environmental, Social, and Governance (ESG) scores and ratings are increasingly used by investors, regulators, and stakeholders to evaluate corporate sustainability performance. Yet for many business leaders, these ratings often feel inconsistent, confusing, and difficult to navigate.
This article unpacks how ESG scores and ratings are designed, why they matter, and what challenges exist in their application today.
ESG factors have become essential considerations in corporate operations and investment decisions, shaping strategy, risk management, and long-term value creation. The global ESG asset market surpassed USD 30 trillion in 2022 and is projected to exceed USD 40 trillion by 2030, representing around a quarter of total assets under management worldwide. This shift underscores how capital allocation is increasingly being driven by sustainability.
Against this backdrop, ESG ratings have taken on growing importance, influencing investor confidence, stakeholder expectations, and corporate reputation. Organisations are under mounting pressure to embed sustainable practices and disclose their ESG performance with transparency. But with so much at stake, how exactly do ESG scores and ratings work—and what challenges limit their effectiveness today?
What is ESG Assets?
ESG assets refer to financial investments managed in line with Environmental, Social, and Governance (ESG) criteria. These criteria evaluate a company’s performance in areas such as environmental stewardship, social responsibility, and corporate governance. In essence, ESG assets represent capital intentionally allocated towards sustainable investments that integrate environmental, social, and governance considerations into strategic and financial decision-making to support long-term value creation.
What are ESG Scores and Ratings?
An ESG score is typically a numerical value (for example, on a scale from 0 to 100) that quantifies how well a company manages ESG issues, based on collected data about its environmental impact, social responsibility, and governance practices. This score reflects a measurable assessment of ESG performance.
An ESG rating, on the other hand, usually translates that numerical score into a letter grade or category (like AAA to CCC or A to D), providing a more easily interpretable summary of the company’s ESG standing relative to peers.
The Challenges of ESG Scores and Ratings
Despite their growing prominence, ESG ratings face several critical challenges that every C-suite leader should be aware of:
Lack of Standardisation Across Providers
Studies reveal that different rating agencies can tell “vastly different stories about the same company”. This is compounded by a lack of high-quality, consistent data on companies’ material ESG factors. The OECD’s 2025 report highlights that ESG metrics often focus on a company’s efforts (input-based, 68%) rather than actual real-world impacts (output-based, 30%), predominantly relying on qualitative data (72%). This “tick-boxing” approach may inadvertently favour larger companies with more resources for disclosure over smaller and emerging market firms.
Focus on Processes Over Impact
ESG ratings frequently assess a company’s internal ESG processes and policies rather than the actual, real-world outcomes or impacts of its products and services. This creates a notable risk that “green credentials” or “sustainability claims” might be overstated without clear evidence of tangible societal or environmental benefits.
Materiality Gaps
Many studies and ESG rating methodologies often confuse “material” and “immaterial” ESG issues. This can lead to CSR efforts like philanthropy or community relations being rated more highly than they deserve, even if they’re not linked to the core business and don’t necessarily improve financial performance.
Data Quality and Bias
Larger companies typically receive higher scores due to better disclosure practices and resources. This disadvantages smaller firms, especially in emerging markets, where data availability is limited.
Confusion in Investment Strategies
ESG integration, negative screening, and impact investing are often lumped together in research and communication. Investors can find it puzzling to navigate the choices and understand how to make sustainability profitable when definitions are fluid. The lack of clarity makes it challenging for investors to choose where to allocate their financial resources effectively
Disclosure vs. Performance
ESG disclosure alone does not drive financial performance; it is the actual performance on ESG issues (e.g., reducing greenhouse gas emissions) that correlates with better financial outcomes. Focusing merely on disclosure without an accompanying strategy is ineffective.
Global Regulatory Fragmentation
The lack of clarity of jurisdiction stems directly from the absence of a unified global regulatory structure, leading to inconsistent standards and a lack of comparability worldwide. The reliance on country-specific legislation for ESG reporting generates different standards, definitions, and disclosures globally, which fundamentally undermines the comparability and utility of ESG scores for international investors seeking clear, unified metrics
As a result, it has compelled the EU to establish robust regulatory frameworks to mandate unified standards, increase transparency, combat greenwashing, and ensure that ESG data and ratings are reliable tools for informing investment and policy decisions.
What this Means for Business Leaders
For executives, the key takeaway is that ESG ratings should not be viewed as definitive sustainability credentials. Instead, they are one input into a broader conversation on risk management, strategy, and stakeholder trust.
Renoir ESG help build credibility and capture long-term value by:
- Support companies in getting ready for an ESG rating through an ESG rating readiness assessment.
- Prioritising material ESG issues that align with your industry and financial performance.
- Focusing on performance, not just disclosure by embedding ESG into core operations and decision-making.
- Helping institutional investors to seek transparency in how ratings are derived and use multiple sources to gain a balanced perspective.
- Aiding in investing in high-quality data and systems to support reporting that reflects both internal processes and real-world outcomes.
Want clarity on what ESG ratings really mean for your business?
