Beyond Greenwashing: Why ESG Ratings Still Can’t Agree

Environmental, Social, and Governance (ESG) investing has grown from a niche strategy into a $3 Trillion global force shaping capital markets. Institutional investors, asset managers, and individual shareholders now routinely incorporate ESG scores into their investment decisions. Yet a key problem persists — the ratings themselves often don’t agree.

In traditional finance, credit ratings from different agencies tend to align closely. When a bond is rated AA by one agency, it’s rarely rated junk by another. But the same cannot be said for ESG ratings.

As Dimson, Marsh, and Staunton (2020) show, the correlation among major ESG raters — such as MSCI, FTSE Russell, and Sustainalytics — is surprisingly low. A company might be considered an ESG leader by one provider and an ESG laggard by another.

For instance, Tesla once received an “AA” rating from MSCI but scored near the bottom under FTSE’s methodology. Why? MSCI focused on Tesla’s zero-emission products, while FTSE penalized the company for factory-level environmental impacts. This case illustrates that ESG scores depend as much on what is measured as on how it is weighted.

The authors identify several sources of inconsistency:

1. Data Discrepancies – Different agencies use different metrics, definitions, and data sources.
2. Benchmarking Choices – Some compare firms within an industry; others use broader market indices.
3. Missing Data and Imputation – When companies don’t disclose metrics, agencies must guess — either assigning a low score or estimating from peers.
4. Information Overload – The explosion of ESG disclosures means raters must filter and interpret vast quantities of data.
5. Weighting Differences – Agencies assign different importance to environmental, social, and governance pillars. For example, in the insurance sector, MSCI gives social factors a 74% weight, while Sustainalytics treats each pillar more equally.

Together, these factors mean that ESG ratings capture not an objective truth but a perspective — a model of corporate responsibility shaped by subjective choices.

Investors often hope that high ESG scores translate into superior risk-adjusted returns. Yet the evidence remains mixed.

• Corporate Governance (“G”) — Early studies (Gompers, Ishii, & Metrick, 2003) found that companies with stronger governance outperformed, but later research showed this advantage may disappear as the market “learns” and prices in governance quality.
• Environmental and Social (“E” & “S”) — Meta-studies of hundreds of papers show only a small positive correlation between ESG and financial performance — and correlation does not imply causation.
• ESG Funds and Indexes — Dimson and colleagues examined flagship ESG indexes such as FTSE4GOOD, MSCI ESG Leaders, and the Dow Jones Sustainability Index. Over the long term, ESG indexes neither consistently outperform nor underperform their conventional benchmarks.

The takeaway: ESG integration appears to offer little direct performance premium — but also little penalty.

Bloomberg has reported extensively on the backlash against ESG. Driven by concerns over lackluster performance, political overreach, and issues like “greenwashing”, firms and investors are rethinking their ESG strategy.

Many investors are disappointed with the financial returns of ESG funds, especially after periods of high inflation, interest rates, and supply-chain disruptions. In this type of market environment, investors should:

• Understand how each provider constructs its scores.
• Use ESG ratings as a starting point, not a substitute for due diligence.
• Combine quantitative ratings with qualitative insights and direct engagement.
• Recognize that ESG data may reflect different values and priorities — environmental impact, social equity, or governance quality — and align those with their own investment mission.

Author’s Note
Cezhan Ambrose, DBA (Pepperdine University), is a Postdoctoral Research Fellow and founder of EnviroGov Solutions. His work explores how governance, finance, and systems thinking can accelerate sustainability transformation.