The Future of ESG Ratings: Can We Trust Sustainability Scores?

ESG ratings are tools that influence corporate investment strategies and behavior. Investors rely on ESG scores to identify sustainable companies, and businesses often seek to improve ratings in order to access capital and the benefits of a better reputation. However, the credibility of these ratings agencies has become a divisive issue, with many stakeholders wondering whether they can trust a company’s sustainability ratings. Companies often receive dramatically different scores from different rating agencies, and average readers struggle to interpret what these scores truly mean.

The Key Problems With ESG Ratings Today

1. Inconsistent Methodologies Create Confusion

One of the most well-known issues plaguing ESG ratings is the lack of standardization. Different agencies use different data sources, weighting systems, and scoring criteria. As a result, a single company can appear both high-risk and low-risk depending on who is evaluating it. These inconsistencies make it difficult for investors to compare companies and to understand what an ESG score actually represents.

2. Focus on Financial Risk Over Real-World Impact

Many ESG ratings schemes prioritize how sustainability issues affect corporate financial performance rather than how companies impact the environment and society. A company with low emissions but poor labor practices could potentially still receive a strong ESG score (depending on the ratings agency in question) as long as those labor issues do not pose a financial risk. This gap between financial materiality and impact materiality has contributed not only to stakeholder confusion, but also to accusations of greenwashing across industries.

3. Data Gaps and Subjective Weighting Undermine Accuracy

ESG ratings depend heavily on self-reported data. Companies choose what to disclose and how to present it, which can lead to incomplete or biased information. Meanwhile, rating agencies apply their own, often opaque, weighting systems to ESG and sustainability indicators, and these indicators are often disjointed amongst ratings firms. 

4. Greenwashing Remains a Persistent Risk

Companies sometimes showcase highly visible sustainability initiatives while downplaying more significant environmental or social challenges. When rating agencies fail to detect these gaps, ESG scores can reinforce rather than expose misleading claims. This dynamic is especially common in industries such as fashion and consumer goods where marketing often outpaces substantive change.

Growing Legal Pressure on ESG Rating Agencies

Increasing scrutiny from regulators has brought ESG rating providers into the spotlight, particularly in the United States and the United Kingdom. 

US lawmakers and regulators have intensified their focus on ESG rating agencies. Several state attorneys general have challenged ESG methodologies, with the Attorney General of Florida even issuing subpoenas to SBTi and CDP. Last year, a congressional hearing explored “whether existing civil and criminal penalties and current antitrust law enforcement efforts are sufficient to deter anticompetitive collusion to promote ESG-related goals in the investment industry.”

The United Kingdom is also taking steps to tighten oversight of ESG rating firms. The Financial Conduct Authority has expressed concerns about opaque methodologies and potential market distortion. The FCA has proposed regulating ESG data and ratings providers under a formal framework, with the goal of ensuring that investors receive accurate and reliable sustainability information. 

Looking into the Future: What’s Changing?

• Ratings agencies will increasingly move toward impact materiality. The concept of double materiality, now central to the EU’s reporting standards, is shifting the way corporations evaluate their activities, and the ways that they interact with the environment and society.
  
  
• Artificial intelligence is transforming ESG data collection. Machine learning tools can analyze vast amounts of unstructured data, from satellite imagery to media reports, to detect sustainability risks in real time. This reduces reliance on self-reported information and can reveal issues that traditional assessments may miss.
  
  
• Finally, stronger regulatory oversight may just improve ratings credibility. The UK’s FCA is exploring implementing rules to improve transparency in ESG rating methodologies. These efforts aim to ensure that scoring systems are consistent, independently verified, and free from conflicts of interest. This will help clarify the ratings system for users around the world.

Can We Trust ESG Ratings?

Today’s ESG ratings remain imperfect. Their inconsistencies, data limitations, and methodological opacity are enough to make anyone relying on them to assess sustainability performance frustrated.

As new oversight and improvements take hold, however, stakeholders should continue to treat ESG ratings as one piece of a larger due diligence process. In turn, companies should ensure that their sustainability claims reflect measurable actions rather than marketing language. The future of ESG ratings depends on transparency, accountability, and alignment with real-world impact. If these elements continue to improve, ESG ratings could become a more reliable tool for driving a sustainable global economy.

---

Frequently Asked Questions

Contact us today for a free consultation and learn how OBATA can support your team in building a clear path toward ESG Ratings.