Aggregating E, S and G scoring is problematic however as it can allow fossil fuel companies to rank as “sustainable”. Only comprehensive reforms at EU level can repair the trust of sustainable investors.
For those who prefer to invest sustainably, an “ESG rating” purports to help these investors by providing an assessment of investee environmental, social, and governance policies and impacts. These ratings are intended to identify ethical investment opportunities. Aggregating E, S and G scoring is problematic however as it can allow fossil fuel companies to rank as “sustainable”. Only comprehensive reforms at EU level can repair the trust of sustainable investors.
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ESG criteria are meant to enable investors to identify and invest in companies addressing sustainability risks and committed to more responsible and ethical practices. These criteria are a close cousin to credit ratings. Whereas credit rating providers assess a company’s risk of defaulting on a loan, ESG ratings providers assess a company’s integration of environmental, social, and governance criteria.
Recurring polemics and scandals about ESG ratings are raising doubts about the transparency of ESG ratings providers. Deeper analysis reveals structural issues caused by lack of consistent and transparent methodology, rather than incidents of fraud or miscalculation. ESG ratings providers now confront a growing scepticism that these ratings may be misused as a fig leaf to repair the image of polluting companies, misleading investors who want to put their money behind sustainable enterprises. Such a potentially-powerful tool for sustainable finance must not enable corporate greenwashing!
ESG ratings must distinguish E, S and G scoring
ESG criteria assess three variables:
- Environment – the company’s environmental risks and impacts
- Social – the way it deals with its social responsibilities
- Governance – the quality and ethics of the company’s governance
However, instead of scoring each of these ESG parameters and reporting them separately, as differentiated scores, ESG ratings providers most often will create a composite of these parameters....
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