ESG foundations
How ESG ratings are built
4 min
Most investors do not assess ESG factors themselves — they rely on ESG ratings produced by specialist agencies. Understanding how these are built (and why they are imperfect) is essential before you trust a single score.
Who produces them
A handful of firms dominate: MSCI, Sustainalytics (owned by Morningstar), S&P Global, Moody's, and others. Each sells ratings to investors and, often, advisory services to companies.
How a rating is constructed
The general recipe is similar across providers:
- Gather data — from company disclosures, regulatory filings, news, NGOs and third parties.
- Pick indicators — dozens to hundreds of data points across E, S and G.
- Weight by materiality — different industries get different weights. Emissions matter enormously for a cement maker; data privacy matters more for a software firm.
- Score and aggregate — combine the weighted indicators into pillar scores and an overall rating, often a letter grade or a 0-100 number.
A critical distinction: risk vs impact
Watch what a rating actually measures. Many ratings — MSCI's in particular — score financial risk to the company from ESG issues, not the company's impact on the world. A tobacco company can score reasonably if it manages its own risks well, even though its product harms people. Confusing "good ESG rating" with "good for the planet" is one of the most common mistakes. Always read what the score is designed to capture.
This content is for educational and informational purposes only and is not investment, financial, tax or legal advice. Trading and investing carry risk, including the possible loss of capital. Any performance shown by third-party tools is hypothetical and not a promise of future results. Do your own research and consider professional advice before making any decision.