ESG Rating Agencies Explained: Why Scores Diverge and What Investors Should Do

If you have ever tried to make sense of ESG ratings, you may have encountered a frustrating phenomenon: two respected rating agencies assessing the same company and arriving at radically different conclusions. One labels the company an ESG leader; the other rates it high risk. Both are using published methodologies applied to the same company. How can they disagree so completely?

This is not a bug in the ESG ratings system. It is a fundamental feature of how ESG is currently measured. Understanding why it happens — and what investors should do in response — is essential for anyone building a portfolio with sustainability criteria.

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The fragmentation problem

There is no single authoritative ESG score, no equivalent of a credit rating from Moody's or S&P where the major agencies generally agree within a narrow band. The ESG rating landscape is fragmented across at least half a dozen major providers:

• MSCI ESG Research: Rates companies on a scale from CCC (laggard) to AAA (leader). Used by many passive ESG ETFs and institutional investors as the primary screening tool.
• Sustainalytics (Morningstar): Measures "unmanaged ESG risk" on a scale from 0 (negligible risk) to 40+ (severe risk). A lower score means lower risk.
• Refinitiv/LSEG: Scores on a 0–100 scale across E, S, and G pillars. Heavy weight on disclosure quality.
• S&P Global (formerly RobecoSAM): Uses the Corporate Sustainability Assessment (CSA), an annual questionnaire-based process. Underpins the Dow Jones Sustainability Index series.
• CDP (formerly Carbon Disclosure Project): Specialises in environmental data — climate change, water, forests. Rates on an A–D scale based on disclosure and performance.
• ISS ESG: Institutional Shareholder Services' sustainability unit. Strong focus on governance; used by institutional investors for proxy voting alongside ESG assessment.

Each of these providers is a credible organisation with experienced analysts. They are not all wrong. The divergence comes from something more fundamental: they are measuring different things, using different data, in different ways.

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Why ESG ratings diverge: the three root causes

The landmark academic paper on this subject is Berg, Koelbel, and Rigobon (2022), published in the Review of Finance. They analysed the correlation between six major ESG rating agencies and found an average pairwise correlation of 0.54. To put this in context: major credit rating agencies (Moody's and S&P) have a correlation of approximately 0.99 when rating the same debt. ESG raters agree with each other less than half as much as credit raters do.

Berg and colleagues attributed the divergence to three causes:

1. Scope — what is included?

Different raters cover different sets of indicators. One agency might include an indicator for biodiversity impact; another ignores it. One might track supply chain labour standards; another focuses only on the company's direct employees. When raters include different indicators, they are simply measuring different things — and a company can perform well on one set of indicators and poorly on another.

2. Measurement — how is it assessed?

Even when two raters include the same indicator — say, carbon emissions — they may measure it differently. Does "carbon" mean Scope 1 emissions only (direct combustion), Scope 1+2 (including purchased electricity), or Scope 1+2+3 (the full value chain)? Is it measured in absolute tonnes or normalised by revenue? A company with declining absolute emissions but rising revenue could look either better or worse depending on which approach is used.

3. Weights — how important is each factor?

Different agencies weight the E, S, and G pillars differently, and weight different industries differently. A mining company's environmental impact is weighted much more heavily by one agency than another. A financial services firm's governance might be weighted heavily by ISS (focused on proxy voting) but modestly by a rater focused on climate.

The divergence is largest on the Social and Governance pillars — where measurement is most subjective. Environmental indicators (particularly carbon emissions) have better data than social indicators (labour practices, community impact), leading to greater consensus on E than on S or G.

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The MSCI vs Sustainalytics contrast in practice

Consider a hypothetical large UK energy company. MSCI might rate it "AA" (leader) based on: strong climate targets (net zero by 2050), robust disclosure, and high scores on transition risk management relative to industry peers. Sustainalytics might simultaneously rate it "High Risk" because it has significant unmanaged controversy risk from ongoing environmental incidents and legal proceedings in emerging markets that MSCI does not weight as heavily.

Both assessments can be correct within their own frameworks. The company genuinely has strong climate governance (MSCI) and genuine exposure to environmental controversies (Sustainalytics). The investor who looks only at one score misses half the picture.

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What investors should actually do

1. Do not rely on a single ESG score. Always check at least two independent ratings. If two reputable agencies fundamentally disagree, investigate why rather than averaging the scores.

2. Understand the methodology before using a rating. MSCI ESG scores are designed for relative assessment within an industry — they reflect how a company manages ESG risks compared to peers, not how it compares in absolute environmental impact. A coal company can be an MSCI ESG "leader" if it manages its environmental risks better than other coal companies. This matters enormously for an investor who wants to reduce carbon exposure.

3. Read the commentary, not just the score. Every major rating agency provides detailed reports behind the headline score. MSCI's ESG ratings reports explain which indicators drove the score and flag controversies. Sustainalytics' risk reports break down the unmanaged risk by category. This granular data is far more useful than the headline number.

4. Assess disclosure quality separately from performance. Refinitiv's scoring is heavily influenced by the quantity of data a company discloses. A company that discloses extensively but has poor actual performance can outscore a company that performs well but discloses little. Disclosure quality is important (it reflects governance and transparency), but it is not the same as ESG performance.

5. Integrate ESG alongside — not instead of — traditional financial analysis. The most useful application of ESG data is identifying material non-financial risks that traditional financial analysis misses: the legal liability risk from an environmental incident; the talent retention risk from a poor workplace culture; the regulatory risk from inadequate data governance. These are business risks. ESG analysis illuminates them; the investor then judges their materiality.

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The greenwashing risk in ratings

ESG ratings themselves can be gamed. Companies have learned what inputs the rating agencies value and can improve their scores by improving their disclosure rather than their actual practices. A company that installs a new sustainability reporting system, publishes a detailed TCFD (Task Force on Climate-related Financial Disclosures) report, and appoints an independent ESG committee may see its ESG scores improve materially without changing a single real-world action.

The EU Corporate Sustainability Reporting Directive (CSRD), which requires large companies to publish standardised, audited sustainability information from 2024–2025, aims to close this gap. Standardised, audited ESG data should gradually reduce the divergence between rating agencies and make greenwashing harder to sustain — but the transition will take several years.

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Practical implications for ESG investors

If you are selecting an ESG equity fund or ETF, pay attention to:

• Which rating agency underpins the index? (e.g. MSCI, Sustainalytics, FTSE Russell)
• What is the minimum exclusion threshold? (Worst decile? Bottom quartile? Industry-specific?)
• What is the turnover? High turnover means high transaction costs and potential for style drift.
• What does "ESG" actually mean to this fund? Exclusion of specific sectors (tobacco, weapons)? Positive best-in-class selection? Impact investing with measurable outcomes?

No ESG label is self-explanatory. The fund documentation — particularly the index methodology document — is the definitive source.

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The value of investments and the income from them can fall as well as rise. ESG ratings are tools to assist investment decision-making, not guarantees of either financial or sustainability outcomes. ESG methodologies change over time and past ratings are not indicative of future assessments. This guide is for information only and does not constitute financial advice.

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How Global Investments can help

Global Investments helps internationally mobile high-net-worth clients build portfolios that reflect both their financial objectives and their values — without surrendering to ESG marketing claims. We provide independent analysis of ESG fund methodologies, help clients navigate the divergence between rating agencies, and structure portfolios that are both financially sound and genuinely aligned with stated sustainability preferences.

Contact us at globalinvestments.net to discuss your ESG investment approach.