What is an ESG Rating?
An explanation of ESG ratings — who produces them, what they measure, why they vary so much between providers, and what SMEs should understand about how they are used.
Key Takeaways
- ESG ratings are assessments of a company's ESG performance produced by third-party agencies.
- Ratings vary significantly between providers because methodologies, weightings and data sources differ.
- Most formal ESG rating products focus on listed companies; SMEs are more likely to encounter ESG questionnaires from customers or banks.
What ESG ratings are
ESG ratings are scores or grades assigned to companies by third-party rating agencies to summarise their environmental, social and governance performance. Major providers include MSCI ESG Ratings, Sustainalytics (owned by Morningstar), S&P Global ESG Scores, and ISS ESG. These ratings are used primarily by institutional investors to screen portfolios, identify ESG risks and compare companies within a sector. Ratings are typically based on publicly available disclosures, questionnaire responses, and the agency's own analysis. Higher-rated companies are considered to manage ESG risks more effectively, which can influence their cost of capital.
Why ESG ratings are controversial
ESG ratings have attracted significant academic and industry criticism for inconsistency. A 2022 study found that correlations between major ESG rating providers were often below 0.5 — meaning the same company could receive a very high rating from one provider and a low rating from another. This happens because providers use different methodologies, weight ESG factors differently, and use different data sources. The lack of standardisation means ESG ratings should be interpreted cautiously. Regulators in the UK and EU are developing oversight frameworks for ESG rating providers to improve transparency and comparability.
What this means for SMEs
Most formal ESG rating products are aimed at publicly listed companies — SMEs are unlikely to receive a formal MSCI or Sustainalytics rating. However, SMEs regularly encounter ESG assessments in a different form: customer due diligence questionnaires, bank lending assessments, public procurement evaluation criteria, and trade finance requirements all involve some form of ESG scoring or assessment. Understanding that these assessments vary in methodology helps you prepare: focus on clear, evidence-based disclosure of your actual ESG performance rather than gaming any particular scoring system. Consistent transparency across all your ESG communication is more resilient than optimising for one rating methodology.