ESG Ratings – What They Are, Who Provides Them, and How Much They Matter
Walk through any large corporate sustainability report, investor questionnaire or fund prospectus and you are likely to encounter an ESG rating. MSCI AAA. Sustainalytics Low Risk. S&P Global 72. These ratings have become a common feature of how companies communicate their sustainability credentials and how investors assess them. Yet the same company can receive materially different scores from different providers, and the methodologies behind the scores are often opaque. This article explains what ESG ratings are, who the main providers are, how they are used in practice, and what is changing in the regulatory and data landscape.
What ESG Ratings Are
ESG ratings are assessments of how well a company manages its exposure to environmental, social and governance risks relative to its industry peers. They are produced by specialised data firms that analyse public disclosures, third-party datasets, regulatory filings and, in some cases, direct company engagement. They are distinct from credit ratings (which assess the likelihood of a borrower repaying its debt) and from ESG scores used in index construction (which may use different data and methodologies). The purpose of an ESG rating is to give investors a summary view of a company’s ESG risk profile that can inform investment decisions, engagement strategies and portfolio construction.
It is important to note what ESG ratings do not do. They do not measure a company’s positive impact on the world. They do not assess whether a company is sustainable in an absolute sense. They assess relative risk management i.e. how well a company is managing the ESG issues that are most financially material to its sector compared to its peers. A mining company with a strong ESG rating has not necessarily resolved its environmental impact; it has demonstrated that it manages the ESG risks relevant to its industry better than most of its peers.
The Main Providers
The three dominant ESG rating providers globally are MSCI, Morningstar Sustainalytics and S&P Global, which together cover more than 39,000 companies worldwide. Each uses a different methodology, scale and focus, which creates divergence in scores for the same company across providers.
MSCI ESG Ratings assess a company’s exposure to industry-specific ESG risks and how well management practices address those risks relative to peers. Ratings run from AAA (leader) to CCC (laggard) and are reviewed annually. MSCI identifies the ESG issues most relevant to each industry, making its approach inherently sector-specific.
Morningstar Sustainalytics uses a risk-based approach and produces an ESG Risk Rating on a 0 to 50+ scale, where lower is better. It measures the degree to which a company’s economic value is at risk from ESG factors that are not adequately managed. The focus is on unmanaged risk, which makes it conceptually different from the MSCI approach even where the underlying data overlaps.
S&P Global ESG Scores, produced through its Corporate Sustainability Assessment (CSA), run from 0 to 100 and draw heavily on a detailed annual questionnaire completed by companies. It is used to construct the Dow Jones Sustainability Indices (DJSI) and is therefore particularly influential for companies seeking inclusion in those benchmarks.
Other providers include LSEG (formerly Refinitiv), ISS ESG, CDP, RepRisk and various specialist providers focused on specific themes such as biodiversity, modern slavery or human rights. The ratings market is large, fragmented and commercially driven, which has contributed to the transparency and consistency concerns that regulators are now beginning to address.
The Divergence Problem
One of the most significant challenges in the ESG ratings market is that different providers frequently give the same company materially different scores. Academic research has documented average correlations between major ESG rating providers of around 0.5, compared to correlations above 0.9 for credit ratings from Moody’s and S&P. The divergence arises from three main sources: differences in the scope of what is measured (which ESG issues are included and which are excluded), differences in measurement methodology (how each issue is quantified), and differences in weighting (how much each issue contributes to the overall score).
The practical consequence for companies is that a strong rating from one provider does not guarantee a strong rating from another, and a poor rating from one provider does not necessarily reflect an ESG deficiency. For investors, the divergence means that two funds with an ESG mandate can hold quite different companies depending on which rating provider’s data they rely on.
When working with corporates we have found that the divergence between providers is a regular feature of the analysis rather than an anomaly. The most useful approach is to understand where the scores differ, trace the divergence to specific methodology choices, and use that understanding to identify the issues that drive the most variation. In most cases, the divergence reflects differences in how providers weight issues that are legitimately contestable, rather than errors on anyone’s part.
How ESG Ratings Are Used in Practice
ESG ratings are well used by the investment industry and should always be taken into some consideration by corporate Australia. Few active investors would take an ESG rating as the primary reason for an investment decision. They are more commonly used as guiding commentary to inform company engagement, peer analysis or valuation work. The passive investment industry, including exchange-traded funds (ETFs), places greater reliance on these ratings, with some ETFs using them as explicit criteria for inclusion or exclusion from the fund.
At Anabranch, we can show clients their ESG ratings as part of our advisory work, as we have access to many providers. It consistently stimulates a productive discussion. When a rating is lower than the management team believes it should be, it encourages them to ask what can be improved, which leads to better outcomes. Management teams do not tend to sit quietly when they discover they are not ranked favourably against their peer group. In most cases, there are meaningful low-hanging fruit opportunities for improvement that can lift a rating with focused effort, and identifying and prioritising those is typically where our advice would start.
We encourage corporate Australia to understand their ratings and to look for ways to improve them. What we would caution against is allowing the rating to drive the sustainability strategy wholly. A company that optimises for a single provider’s score without building genuine underlying capability is likely to find that the rating moves in unexpected directions as methodologies evolve, and that the score becomes harder to defend under investor scrutiny.
The Regulatory Landscape
ESG rating providers have, until recently, operated without direct regulatory oversight in most jurisdictions. However, recently, the European Union became the first jurisdiction to formally regulate ESG ratings when its ESG Ratings Regulation entered into force on 2 January 2025, applying from 2 July 2026 under the European Securities and Markets Authority (ESMA). Under the regulation, providers must disclose their methodologies, manage conflicts of interest (including separation of rating and advisory activities), and register or obtain authorisation to operate in the EU. The UK has a parallel framework in development. In the United States, the regulatory approach has been less prescriptive, focusing on greenwashing enforcement against fund managers rather than direct regulation of rating providers.
Australia has not yet regulated ESG rating providers, though the call for regulation is growing in line with the scale of ESG investment in the market. The International Capital Markets Association (ICMA) voluntary Code of Conduct for ESG Ratings and Data Products Providers, launched in December 2023, is the current interim global standard and is available to Australian-operating providers.
What Good Regulation Could Looks Like
Good regulation of ESG rating providers should produce one fundamental outcome: replicability. A rating should be replicable by any party that follows the provider’s published methodology, rather than being a black box of unknown inputs and weightings. Transparency of methodology, data sources and scoring logic is the foundation of that outcome.
Beyond transparency, good regulation should address conflicts of interest (particularly where a provider rates entities it also advises commercially), ensure adequate governance and quality controls, and establish minimum standards for how companies are notified of their ratings and given the opportunity to engage with the underlying data. The EU model, grounded in the International Organisation of Securities Commissions (IOSCO) key regulatory outcomes, provides a reasonable starting framework.
Our View
ESG ratings are a useful tool and they should remain part of how Australian companies and investors understand ESG risk. The ratings are particularly valuable as a prompt for engagement and peer comparison, both of which tend to drive improvement in corporate ESG practice.
We hope Australia moves toward regulating ESG rating providers, and we would encourage using the EU standard as a starting point. The transparency and conflict-of-interest requirements in the EU model address the most significant structural concerns in the current market.
The ratings landscape itself is also likely to change meaningfully as AASB S2 data enters the public sphere. Rating providers have historically had to estimate or assume climate-related risk metrics for companies that did not disclose them, often treating non-disclosure as a signal of higher risk. As standardised, assured climate data becomes available across a much broader range of Australian companies, the methodologies behind ESG ratings will have real data to work with for the first time. That may shift the weight that providers place on carbon-related factors (which will become more directly comparable) and increase focus on other dimensions of ESG where data remains limited and inconsistent.
For companies, the practical implication is that understanding your current rating, identifying where the gaps are relative to your peers, and addressing the most actionable improvement opportunities is worthwhile work now, before the methodologies shift. A company that builds ESG capability rather than optimising narrowly for a score will be better placed to maintain its standing as the ratings landscape evolves.
Sources
- MSCI, ESG Ratings Methodology, msci.com
- Morningstar Sustainalytics, ESG Risk Ratings Methodology, sustainalytics.com
- S&P Global, Corporate Sustainability Assessment (CSA) Methodology, spglobal.com
- The Impact Investor, ESG Ratings Explained: Methodologies, Scales and Caveats, February 2026, theimpactinvestor.com
- International Organisation of Securities Commissions (IOSCO), Report on ESG Ratings and Data Products Providers, November 2021, iosco.org
- International Capital Market Association (ICMA), Code of Conduct for ESG Ratings and Data Products Providers, December 2023, icmagroup.org
- European Securities and Markets Authority (ESMA), ESG Ratings Regulation, applying from 2 July 2026, esma.europa.eu
- Regulation Tomorrow, Financial Services Regulatory ESG Updater, September 2026, regulationtomorrow.com
- Lexology, Australia: Regulation for ESG Ratings Agencies Gathers Pace, July 2023, lexology.com
- KnowESG, Commonwealth Bank of Australia ESG Ratings Coverage, May 2026, knowesg.com
Anabranch ESG Advisory provides independent advice on ESG strategy, climate disclosure, and sustainability reporting. The information in this article is general in nature and does not constitute legal or financial advice.
