An ESG score is a numerical or letter-based rating that measures a company’s environmental, social, and governance performance. These scores help investors, companies, and regulators evaluate corporate sustainability and responsibility practices.
ESG scores vary significantly across rating providers because each uses different methodologies and data sources. This guide explains how ESG scores are calculated, compares major rating systems, and shows how businesses and investors use these scores in decision-making.
What Is an ESG Score?
An ESG score is a numerical or graded rating that measures how well a company performs on environmental, social, and governance factors. It evaluates corporate performance across three key pillars: environmental impact, social responsibility, and governance practices. Investors, mutual funds, and lenders use these scores to assess sustainability performance and corporate responsibility.
ESG scores are based on disclosed metrics, company reports, and third-party data. The scores are not standardized across rating agencies. Different providers use different methodologies, which means the same company can receive different scores from different agencies.
Why ESG Scores Matter
ESG scores serve multiple critical functions in modern business and finance. Here are some of them:
- Investors use ESG scores to screen potential investments and build sustainable portfolios. The scores help identify companies with strong sustainability practices and those with higher ESG-related risks.
- Financial institutions rely on ESG scores for risk assessment. Companies with poor ESG performance may face regulatory penalties, reputational damage, or operational disruptions. Strong ESG scores signal lower long-term risk.
- ESG scores influence access to capital. Many institutional investors and lenders now require minimum ESG performance levels. Companies with higher scores often secure better financing terms.
- ESG scores build stakeholder trust and protect corporate reputation. Customers, employees, and communities increasingly favor companies with strong sustainability commitments.
- Regulators monitor ESG scores as indicators of compliance and corporate responsibility. Strong ESG performance can signal alignment with emerging regulatory requirements.
How ESG Scores Are Calculated
ESG score calculation involves multiple steps and varies by rating provider. Understanding the general methodology helps companies improve their scores and helps investors interpret ratings correctly.
Step-by-Step ESG Score Methodology
- Data collection Rating agencies gather information from company sustainability reports, annual filings, regulatory disclosures, news sources, and third-party databases.
- ESG metrics evaluation Agencies assess specific metrics for each ESG pillar. Environmental metrics include carbon emissions and water usage. Social metrics cover labor practices and diversity. Governance metrics examine board structure and ethics policies.
- Industry materiality weighting Different ESG factors matter more in different industries. Carbon emissions carry more weight for energy companies than for software firms. Labor practices matter more for manufacturing than for real estate investment trusts.
- Risk versus performance scoring Some agencies focus on ESG risks that could harm company value. Others measure positive ESG performance and impact. This philosophical difference produces different score interpretations.
- Normalization and peer comparison Agencies compare companies against industry peers. Scores reflect relative performance within sectors rather than absolute performance across all companies.
- Final rating output Agencies convert analyzed data into final scores. Formats include numerical scores, letter grades, or risk categories.
Key Factors Used in ESG Scoring
ESG scores evaluate performance across three distinct categories. Each category contains multiple subfactors that rating agencies assess.
Environmental Factors
- Emissions: Greenhouse gas emissions from operations and supply chains represent a company’s climate impact.
- Energy use: Energy consumption patterns and renewable energy adoption indicate environmental efficiency.
- Climate risk: Physical and transition risks from climate change affect long-term business viability.
- Waste: Waste generation, recycling rates, and circular economy practices demonstrate resource management.
- Water: Water consumption and wastewater management matter especially for water-intensive industries.
Social Factors
- Labor practices: Working conditions, fair wages, and labor rights protection affect workforce stability.
- Diversity: Board diversity, workforce diversity, and equal opportunity programs indicate inclusive practices.
- Safety: Workplace safety records and health protection measures demonstrate employee care.
- Community impact: Local community relations, charitable giving, and social investment build social license.
- Human rights: Supply chain labor standards and human rights policies prevent exploitation and reputational risk.
Governance Factors
- Board structure: Board independence, diversity, and expertise affect oversight quality.
- Ethics: Anti-corruption policies, whistleblower protections, and ethical business practices prevent misconduct.
- Transparency: Financial reporting quality and ESG disclosure completeness enable stakeholder assessment.
- Executive pay alignment: Compensation structures that link pay to long-term performance and ESG goals drive sustainable decision-making.
Major ESG Score & Rating Providers
Several major agencies provide ESG scores and ratings. Each uses distinct methodologies that produce different results for the same company.
MSCI ESG Ratings
MSCI assigns letter grades ranging from AAA (best) to CCC (worst). The system uses seven rating levels: AAA, AA, A, BBB, BB, B, and CCC.
MSCI employs industry-relative scoring. Companies are compared against peers in the same sector. A BBB-rated oil company may have different absolute performance than a BBB-rated technology company.
Sustainalytics
Sustainalytics provides ESG risk scores that measure unmanaged ESG risk exposure. Scores range from 0 to 40+, with lower scores indicating lower risk.
The rating categories include negligible risk (0-10), low risk (10-20), medium risk (20-30), high risk (30-40), and severe risk (40+). This risk-based approach differs from performance-based ratings.
S&P Global ESG Scores
S&P Global bases its scores on the Corporate Sustainability Assessment. Companies receive scores from 0 to 100 based on industry-specific questionnaires.
S&P focuses on financially material ESG factors. The assessment identifies which ESG issues most affect long-term value in each industry.
Refinitiv ESG Scores
Refinitiv calculates ESG scores from publicly disclosed company data. Scores range from 0 to 100, with higher scores indicating better ESG performance.
The Refinitiv model emphasizes transparency and disclosure quality. Companies with comprehensive ESG reporting receive higher scores.
Important note: ESG scores differ significantly between providers because each uses different methodologies, data sources, weighting systems, and scoring philosophies. A company rated highly by one agency may receive a lower rating from another agency.
ESG Score vs ESG Rating vs ESG Metrics
These three terms are related but distinct. Understanding the differences helps interpret ESG information correctly.
| Term | Meaning | Output |
| ESG Metrics | Raw data points measuring specific ESG factors | Numbers (tons CO2, % women on board, injury rates) |
| ESG Score | Aggregated numeric result combining multiple metrics | Numerical score (0-100, 0-10, etc.) |
| ESG Rating | Categorized grade based on score ranges | Letter grades (AAA, BB) or risk categories (Low Risk, High Risk) |
How Investors Use ESG Scores
Investors integrate ESG scores into investment processes in several ways.
- Portfolio screening: Investors exclude companies below minimum ESG score thresholds. Negative screening removes companies with poor ESG performance from investment universes.
- Fund construction: ESG-focused funds select holdings based partially or entirely on ESG scores. Sustainable funds may hold only companies with scores above certain levels.
- Risk filtering: Investors identify ESG-related risks that could affect returns. Low ESG scores may signal regulatory risk, reputational risk, or operational vulnerabilities.
- Sector comparison: Investors compare ESG performance within industries. Scores help identify sustainability leaders and laggards in each sector.
- Engagement decisions: Investors use ESG scores to prioritize engagement targets. Companies with low scores may face shareholder pressure to improve ESG performance.
How Companies Can Improve Their ESG Score
Companies can take concrete steps to strengthen their ESG scores and ratings.
- Improve ESG disclosures: Publish comprehensive sustainability reports with detailed ESG data. Rating agencies score disclosed information, so transparency directly affects ratings.
- Align with reporting frameworks: Use recognized frameworks like GRI, SASB, or TCFD. Standardized reporting makes it easier for agencies to assess performance.
- Track material ESG metrics: Identify which ESG factors are financially material for your industry. Focus improvement efforts on metrics that rating agencies prioritize.
- Strengthen governance practices: Establish independent boards, implement ethics policies, and create ESG oversight committees. Strong governance forms the foundation of ESG credibility.
- Set measurable ESG targets: Commit to specific, time-bound ESG goals. Targets demonstrate commitment and provide benchmarks for progress.
- Get third-party assurance: Have external auditors verify ESG data and reports. Assurance increases data credibility and can improve scores.
Limitations of ESG Scores
ESG scores have significant limitations that users should understand.
- Methodology differences: Each rating agency uses different formulas, weights, and factors. These differences produce inconsistent scores across providers.
- Data gaps: Many companies, especially smaller firms, do not publicly disclose comprehensive ESG data. Rating agencies must estimate missing data, which reduces accuracy.
- Disclosure bias: Scores often favor companies with robust disclosure systems over companies with strong actual performance but weaker reporting. Good marketing can outperform good practice.
- Rating disagreements: Studies show low correlation between ESG ratings from different providers. The same company may rank in the top quartile with one agency and bottom quartile with another.
- Greenwashing risk: Companies can manipulate perceptions through selective disclosure and marketing without making substantive changes. Scores may not always reflect true ESG impact.
- Lack of universal standard: No global standard governs ESG scoring methodology. The absence of standardization makes comparisons difficult and reduces score reliability.
- These limitations mean ESG scores should inform decisions but not serve as the sole basis for investment or business judgments.
ESG Score Example (Mini Case Illustration)
This hypothetical example shows how ESG scoring works in practice.
Company: TechCorp, a mid-sized software company
Selected ESG Metrics:
- Carbon emissions: 5,000 tons CO2e per year
- Renewable energy: 60% of electricity consumption
- Board diversity: 40% women directors
- Employee turnover: 12% annually
- Ethics training: 100% of employees completed
- Data breach incidents: 0 in past 3 years
Weighting by Category:
- Environmental: 30%
- Social: 35%
- Governance: 35%
Scoring (0-100 scale):
- Environmental score: 75/100 (strong renewable energy adoption, moderate emissions)
- Social score: 70/100 (good diversity, average turnover)
- Governance score: 85/100 (strong ethics, zero data breaches)
Final ESG Score Calculation: (75 × 0.30) + (70 × 0.35) + (85 × 0.35) = 22.5 + 24.5 + 29.75 = 76.75/100
Rating Category: This score would typically translate to an “A” or “Low Risk” rating, indicating strong ESG performance relative to industry peers.
FAQs: ESG Score
A good ESG score depends on the rating system used. For MSCI, scores of A or higher indicate above-average performance. For Sustainalytics, scores below 20 represent low risk. Generally, scores in the top 30-40% of industry peers are considered good. Context matters more than absolute numbers.
Specialized rating agencies give ESG scores. Major providers include MSCI, Sustainalytics, S&P Global, Refinitiv, Bloomberg, and ISS ESG. Each agency has its own methodology. Investment research firms and data providers also offer proprietary ESG assessments.
No, ESG scores are not standardized. Each rating agency uses different methodologies, data sources, and weighting systems. This lack of standardization means companies receive different scores from different agencies. Industry groups and regulators are working toward more standardization, but no universal standard currently exists.
ESG scores differ because agencies disagree on what matters most, how to weight factors, and how to measure performance. Some focus on risk while others measure positive impact. Data availability varies by source. Industry materiality frameworks differ. These methodological differences produce inconsistent scores for the same company.
Small companies can get ESG scores, but coverage is limited. Major rating agencies focus primarily on publicly traded companies and large corporations because these entities provide more data. Small companies can improve their chances by publishing sustainability reports, participating in ESG surveys, and working with specialized small-cap ESG raters. Some agencies offer paid assessment services for companies not in their coverage universe.