ESG ratings explained

What are ESG ratings?

An ESG rating is an opinion on a company's ESG profile, risk or impact, expressed as a score or grade using a defined methodology. Providers include specialist ESG firms, index companies and credit rating agencies. Some focus on financial risk to the company from ESG issues, others on the company's impacts, and some on a single topic, such as the climate scores based on CDP questionnaires. Investors use them alongside their own analysis, and indices use them to decide which companies to include. See ESG KPIs explained and building an ESG KPI dashboard.

How are ESG ratings calculated?

• The provider classifies the company by industry and selects the issues it treats as material for that industry.
• For each issue, it assesses exposure, how much risk the business faces, and management, what policies, targets and performance the company shows.
• It gathers data from reports, websites, questionnaires, regulatory filings, news and its own estimates where data is missing.
• It weights the issues, adds the pillar scores, adjusts for controversies such as accidents or lawsuits, and often ranks the result against industry peers.

Industry weights matter: carbon emissions can dominate a utility's rating and barely count for a software company. See SASB standards and industry-based metrics.

ESG ratings in practice: how one score is built

A provider rates an industrial machinery maker, weighting environment at 50%, social at 30% and governance at 20% for its industry, and scoring each pillar out of 10.

The weighted pillars give 5.6, and a product safety recall in the year costs 0.4 points, leaving 5.2, which the provider maps to a middle grade within the machinery peer group. Another provider weighting governance at 40% and ignoring the recall would score the same company higher, from the same data. The company's low social score reflects missing safety data for contractors, which it can fix by disclosing it. See workforce metrics.

Why do ESG ratings differ between providers?

Research by Berg, Kölbel and Rigobon, published in 2022, found correlations of 0.38 to 0.71 between six major providers' ratings, against about 0.99 for credit ratings. It traced the differences to scope, the issues included; weights, how much each counts; and above all measurement, how the same issue is measured. Gaps in disclosure, which providers fill with estimates or penalise, add more. The lesson for investors is to understand a rating's methodology, and for companies that one rating is not a verdict on their performance.

How are ESG rating providers regulated?

The EU's ESG Rating Regulation, Regulation (EU) 2024/3005, applies from 2 July 2026. Providers issuing ratings publicly or to clients in the EU must be authorised and supervised by ESMA; providers already operating had to notify ESMA by 2 August 2026 and apply by 2 November 2026, and can continue while their applications are decided. Non-EU providers can operate through equivalence, endorsement by an EU affiliate, or recognition if their turnover is below EUR 10 million. The regulation requires published methodologies, rules on conflicts of interest, separation from certain other business activities, and fees to ESMA. In the UK, the FCA consulted in December 2025 on a regime starting on 29 June 2028, with final rules expected in the fourth quarter of 2026; its proposals let rated companies see the data behind their ratings and correct factual errors.

How do ESG ratings differ from reporting standards?

Reporting standards, such as the ISSB standards, the ESRS and GRI, tell companies what to disclose; ESG ratings are third-party opinions built from what companies disclose and other data. Ratings are not assurance, and a good rating does not show that a company meets any standard. Better reporting under recognised standards gives providers more reliable data and fewer estimates. See sustainability reporting explained.

How can companies manage their ESG ratings?

• Find out which ratings matter to the company's investors, lenders and index providers.
• Review the data each provider holds, and correct factual errors through its review process.
• Answer key questionnaires, such as CDP's, completely and consistently with published reports.
• Close disclosure gaps rather than chase scores, and avoid claims that create greenwashing risk.

This guide is general information. It is not tax or legal advice for your situation.