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Our guide to understanding an ESG score
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Today, ESG scores are shaping investment decisions, influencing how companies are perceived by customers and employees, and increasingly determining access to capital. But despite their growing importance, ESG scores are often misunderstood - even by the companies being rated!
What does a “good” ESG score actually mean? Who decides it? And how much weight should businesses and investors really give these ratings?
In this article, we'll cover:
What an ESG score is and what it actually measures
Who uses ESG scores, and how they influence real business and investment decisions
Who provides ESG scores, and why methodologies differ so widely
How ESG scores are calculated, including the role of data, weighting, and materiality
The limitations and criticisms of third-party ESG ratings
How ESG rating regulation is evolving in the UK, EU, and US - and what this means for companies
What is an ESG score?
An ESG score (sometimes called an ESG rating) is a way of turning a company’s environmental, social, and governance performance into a single, comparable signal. Depending on the provider, that signal might be a number, a letter grade, or a risk category.
Most ESG scores are produced by third-party rating agencies using a mix of company disclosures, public filings, regulatory data, and media analysis. But while the inputs may look similar on paper, the way they’re weighted and interpreted varies widely – which is why the same company can receive very different scores from different providers.
One of the most important things to understand is this: ESG scores are usually about risk, not impact.
Rather than measuring a company’s absolute environmental footprint, most ESG ratings assess how well a business manages ESG-related risks that could affect its financial performance. These assessments are typically made relative to industry peers, not against a universal sustainability benchmark.
This explains some of the counterintuitive results people often notice. A high-emissions company can score well if it has strong governance, clear policies, and robust risk management, while a lower-impact business may score poorly if its ESG practices are weak or poorly disclosed.
In short, an ESG score isn’t a verdict on whether a company is “good” or “bad”. It’s a snapshot of how well that company is managing ESG risks – according to a specific methodology, at a specific point in time.
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What does an ESG score actually measure?
At a glance, an ESG score looks like a simple summary of a company’s environmental, social, and governance performance. In reality, it’s a much more specific and narrower signal.
ESG score vs ESG reporting
ESG reporting is what a company discloses; an ESG score is how that information is interpreted, weighted, and judged by a third party.
Reporting is descriptive. Scoring is evaluative. One feeds into the other, but they are not the same thing.
📝 ESG reporting
Describes how a company reports on its environmental, social, and governance practices.
Covers policies, actions, targets, and performance metrics across ESG topics.
Controlled by the company, often aligned with frameworks like GRI, TCFD, or CSRD.
Designed to improve transparency and accountability for stakeholders.
Does not, on its own, provide a judgement or comparison.
📊 ESG score
An external assessment that translates ESG information into a rating or risk signal.
Draws on disclosures alongside filings, media analysis, and third-party data.
Methodology and weighting are defined by the rating provider, not the company.
Used for benchmarking, comparison, and investment decision-making.
Scores can vary widely between providers due to differing models.
Risk-based vs impact-based scoring
Most mainstream ESG scores are risk-based, not impact-based – and this is where confusion often creeps in.
Risk-based scores assess how exposed a company is to ESG-related risks, and how well it manages them. Impact-based approaches, by contrast, look at the real-world effects a company has on the environment and society.
⚠️ Risk-based ESG scoring
Assesses how exposed a company is to ESG-related financial risks.
Focuses on governance, policies, controls, and disclosure quality.
Scores are typically weighted by financial materiality and sector relevance.
Widely used by investors, lenders, and insurers.
A high-impact company can still score well if risks are well managed.
🌍 Impact-based ESG scoring
Measures a company’s real-world environmental and social impacts.
Looks at absolute outcomes such as emissions, resource use, or social harm.
Less focused on financial risk and more on contribution to sustainability goals.
More common in reporting, policymaking, and impact-led strategies.
Still less prevalent in mainstream ESG ratings.
Who uses ESG scores - and how?
ESG scores show up in more places than many companies realise. They’re used to inform investment decisions, influence lending and insurance terms, and increasingly play a role in how suppliers and partners are assessed.
Different audiences look at the same score in very different ways. What matters to an investor isn’t necessarily what matters to a bank or a procurement team.
The cards below break down who uses ESG scores and what they’re typically used for in practice.
💼
Investors & asset managers
What they’re looking for: a comparable signal of long-term risk and resilience.
How it’s used: screening, peer comparison, portfolio weighting, and engagement priorities.
Typical outcome: invest, divest, reweight, or push for stronger disclosure and governance.
🏦
Lenders & insurers
What they’re looking for: exposure to operational, regulatory, and climate-related risk.
How it’s used: informing credit decisions, pricing, covenants, and insurance eligibility.
Typical outcome: adjusted loan terms, higher/lower premiums, or additional conditions.
🏢
Corporates
What they’re looking for: a benchmark against peers, and a reality-check on external perception.
How it’s used: identifying gaps in data, governance, and policies – then prioritizing improvements.
Typical outcome: clearer ESG roadmap, stronger disclosures, and better investor readiness.
🔗
Procurement & supply chains
What they’re looking for: supplier risk – from labour practices to environmental compliance.
How it’s used: onboarding decisions, preferred supplier lists, and contract requirements.
Typical outcome: supplier selection, corrective action plans, or tighter reporting expectations.
Who provides ESG scores?
Most ESG scores are produced by third-party rating agencies that specialize in analyzing companies’ environmental, social, and governance performance. These organizations collect data from public disclosures, regulatory filings, media sources, and proprietary research, then apply their own methodologies to generate ESG ratings or risk scores.
Alongside these external ratings, some companies also develop internal ESG scoring systems. These are typically based on recognised frameworks and used for internal benchmarking, risk management, or strategy-setting rather than public comparison. Internal scores can be useful, but they don’t carry the same weight as an external rating used by investors or lenders.
It’s important to be clear about what ESG rating agencies are – and what they are not.
ESG rating agencies are NOT regulators. They don’t set legal requirements, and they don’t certify compliance. Instead, they act as independent data providers, each applying its own view of what matters, how risks should be weighted, and how performance should be assessed.
Major ESG rating providers
While the market includes dozens of players, a small group of providers are most commonly referenced by investors, financial institutions, and large corporates, these include:
MSCI ESG Ratings
Provides industry-relative ESG ratings focused on financially material risks for investors.
Sustainalytics ESG Risk Ratings
Measures unmanaged ESG risk and exposure, widely used by asset managers and lenders.
S&P Global ESG Scores
Combines corporate disclosures and sector-specific analysis to support benchmarking.
Moody’s ESG Solutions
Integrates ESG risk analysis into broader credit and financial risk assessments.
FTSE Russell ESG Ratings
Offers ESG ratings and indices used for portfolio construction and benchmarking.
ISS ESG Ratings
Focuses on governance, shareholder rights, and sustainability risk analysis.
Bloomberg ESG Data
Aggregates reported ESG data for use in financial analysis and market research.
CDP Climate, Water, and Forest Scores
Assesses environmental disclosure and management across climate, water, and deforestation.
Each of these providers uses its own methodology and focuses on slightly different aspects of ESG risk and performance, which is why the same company can receive very different scores depending on who is doing the assessment.
How is an ESG score calculated?
ESG scores are built by collecting large amounts of ESG-related data and translating it into a single assessment using a provider’s own methedology. While the details vary from one agency to another, the process usually follows the same broad steps.
Step 1: Data collection
ESG rating agencies pull information from multiple sources, including:
ESG rating agencies pull information from multiple sources, including:
- Company disclosures and sustainability reports
- Regulatory and financial filings
- Public databases and NGO reports
- Media coverage and controversy analysis
- Estimates or modelled data where information is missing
Step 2: Weighting and materiality
Once data is collected, it’s weighted according to what each provider considers material for a given industry. For example, emissions and climate risk may carry more weight for an energy company, while data privacy or labour practices may be prioritized for a tech firm. These weightings are rarely identical across providers, and small differences can have a big impact on the final score.
Once data is collected, it’s weighted according to what each provider considers material for a given industry. For example, emissions and climate risk may carry more weight for an energy company, while data privacy or labour practices may be prioritized for a tech firm. These weightings are rarely identical across providers, and small differences can have a big impact on the final score.
Step 3: Scoring and aggregation
The weighted data is then aggregated into a final ESG assessment, which may be presented as:
The weighted data is then aggregated into a final ESG assessment, which may be presented as:
- A numerical score (for example, 0–100)
- A letter grade (such as AAA–CCC)
- A risk category (low, medium, high risk)
Why ESG scores differ so much
Even when providers rely on similar data, ESG scores can vary widely because:
- Assumptions are made when data is missing or incomplete
- Materiality is defined differently across methodologies
- Controversies and qualitative factors are interpreted differently
- Methodologies are proprietary and not fully transparent
In other words, ESG scores are not purely objective measurements. They are structured assessments shaped by judgement calls at every stage – which is exactly why understanding the methodology matters.
How should companies interpret their ESG score?
An ESG score is a useful signal, but it isn’t a verdict on a company’s overall sustainability performance. It reflects how a specific rating provider assesses ESG risks and disclosures at a given moment in time, using its own methodology.
The score is most useful when it’s used for like-for-like benchmarking. Comparing against direct peers within the same sector – and using the same provider – helps companies understand how they’re positioned and where they may be falling behind. Cross-sector comparisons or mixing scores from different providers can quickly become misleading.
Rather than treating ESG scores as targets to optimize, the most effective companies use them as a diagnostic tool. Looking beneath the headline score helps identify gaps in data, governance, or risk management that can then be addressed through concrete actions.
This is where expert support matters. Working with a partner - like Greenly - that understands both ESG requirements and scoring methodologies allows companies to focus on improving underlying practices and data quality – not simply chasing a higher rating.
The problem with third-party ESG ratings
While third-party ESG ratings can be genuinely useful: they help investors and companies compare organizations, spot potential red flags, and bring structure to complex ESG information. But they’re not a perfect measuring stick. The issues below are the main reasons ESG scores can feel confusing, and why two providers can look at the same company and reach different conclusions.
Low correlation between providers
The same company can receive very different ESG scores.
This doesn’t always mean one score is “wrong.” Different assumptions, weightings, and definitions of materiality mean outcomes depend on the lens being applied.
Limited methodology transparency
It’s often unclear how final scores are produced.
Providers usually explain their approach at a high level, but the underlying scoring models are proprietary - making it hard to trace results back to specific assumptions.
Over-reliance on disclosed data
Reporting quality can influence scores as much as performance.
Companies with strong reporting processes may score better than peers with similar impacts but weaker disclosure - especially where external data is limited.
Box-ticking risk
Chasing ratings can reward optics over substance.
When scores become the goal, companies may prioritize policies and documentation that “score well”, rather than tackling deeper, long-term sustainability challenges.
None of this makes ESG ratings meaningless. It just means they work best as one input among many.
Are ESG scores being regulated?
ESG ratings now play a meaningful role in investment decisions and capital allocation, which has pushed regulators to look more closely at how they’re produced.
However, the regulatory picture is very much dependent on the country or location, with different oversight in the UK, US, and EU:
🇬🇧 United Kingdom
ESG ratings are not yet directly regulated and have so far been guided mainly by voluntary standards, including an industry-led code of conduct.
In December 2025, the FCA consulted on how it would regulate ESG ratings providers once legislation brings them into the regulatory scope.
The proposed regime focuses on governance, systems and controls, methodology transparency, and conflicts of interest.
🇪🇺 European Union
The EU has adopted a dedicated ESG Ratings Regulation introducing a formal authorization and supervision regime.
ESG ratings providers operating in the EU will be overseen by the European Securities and Markets Authority (ESMA).
The regulation is designed to improve transparency, address conflicts of interest, and bring greater consistency to the market.
🇺🇸 United States
There is no dedicated federal regulatory regime specifically for ESG ratings providers.
Oversight instead comes indirectly through disclosure rules, fund marketing requirements, and anti-misleading enforcement.
The US approach remains disclosure-led, rather than focused on supervising ESG ratings themselves.
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SEO score FAQs
Are ESG scores mandatory for companies?
No. There is currently no requirement for companies to obtain an ESG score. However, many companies are assessed by ESG rating agencies regardless, using publicly available information. In practice, ESG scores often influence investors, lenders, and insurers even when companies haven’t actively sought a rating.
Can a company have more than one ESG score?
Yes. Companies are often rated by multiple ESG providers at the same time, and those scores can differ significantly. Each provider uses its own methodology, data sources, and weighting models, which is why there is no single “official” ESG score.
Do ESG scores measure environmental impact?
Not directly. Most ESG scores are risk-based, meaning they focus on how well a company manages ESG-related risks that could affect financial performance. They do not usually measure a company’s absolute environmental or social impact.
Do ESG scores affect access to finance?
ESG scores are often used alongside traditional financial metrics when assessing investment risk, loan terms, insurance coverage, or eligibility for sustainability-linked products. They rarely act alone, but they can influence conditions and pricing.
Is a higher ESG score always better?
Not necessarily. A higher score indicates stronger ESG risk management according to a specific provider’s methodology, but it doesn’t mean a company is low-impact or fully sustainable. Context – including sector, geography, and scoring model – always matters.
Can companies improve their ESG score?
Companies can improve how they are assessed by strengthening governance, addressing material risks, improving data quality, and making disclosures clearer and more consistent. That said, chasing a score without improving underlying practices can be counterproductive.
Are ESG scores reliable?
ESG scores are useful indicators, but they are not definitive or fully objective. They reflect judgement calls around data, materiality, and weighting. This is why they work best as one input among many, rather than as a standalone decision-making tool.
How are ESG scores different from sustainability ratings or certifications?
ESG scores assess risk and management practices, usually from an investor perspective. Certifications and labels, by contrast, often verify compliance with specific standards or performance thresholds. They serve different purposes and aren’t directly interchangeable.
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What about Greenly?
Streamlined ESG Data Management & Compliance
Greenly streamlines the complex process of ESG data collection, consolidation, and management all in 1 platform.
📥 Import qualitative & quantitative data — platform processes & flags errors
🤖 AI-powered data processing & auto-filling of answers
🔗 Integrated connectivity: map & connect data points across indicators, eliminate redundancy
📂 Centralized platform for all ESG data & supporting docs
⏱️ Track collaborator progress, set reminders & deadlines for compliance
🛡️ Audit-ready traceability: instantly track every change
📊 ESG dashboards to track all key KPIs
🏢 Multi-entity task management & data ingestion at all levels
🧠 AI-powered pre-filling from documentation saves weeks of manual work
🧮 Automatic calculations handle dependencies & speed up consolidation
📈 Multi-entity data collection simplified by mirroring company structure
Strategic ESG Impact & Risk Mitigation
Greenly empowers companies to move beyond reporting to develop strategy, identify risks, and unlock opportunities.
📋 Automated Double Materiality Assessment (DMA) built with CSRD experts
🤖 AI-powered climate risk forecasting integrated into DMA with site-level detail
💰 Translate climate risk into quantified financial opportunities
📍 Location-specific financial risk breakdowns with IPCC-backed data
🔎 Data gap analysis from DMA to improve future reporting
📈 Automated Climate KPI integration
📊 Advanced Materiality Module: benchmarks & specialized add-ons (e.g., CSA)
Tailored & Future-Ready Reporting
Flexible reporting with interoperability across 15+ frameworks.
📝 Custom framework creation with tailored reports
🔀 Interoperability across 10+ frameworks with harmonized database
⚡ Accelerated report creation with AI-powered generation and pre-filling
📄 Auto-generation of complete ESG reports (qualitative & quantitative data)
🛡️ Audit-ready guaranteed reports
💻 Automated ESG report gen incl. XHTML & XBRL for CSRD
📂 Centralized audit trails & attachments per indicator
🤝 Collaborative workflows managing full indicator lifecycle
Expert Guidance & Continuous Support
Comprehensive support & training to empower ESG teams and ensure successful, autonomous reporting.
🧑💼 Dedicated Project Managers & ESG Experts for each framework
📚 Extensive training & resources available on the platform
🤖 AI-powered in-app chatbot (24/7) for instant answers
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