ESG ratings: seeing the value in divergent views

WHEN it comes to choosing a university or buying a car, comparative ratings can help us make better decisions. But what happens when rankings diverge – or worse, contradict one another? Should they be disregarded, or can they still deliver valuable information?

It’s not just a question for university aspirants or car buyers. In the financial world, ratings divergence is a topic of intense debate, especially when it comes to environmental, social and governance (ESG) ratings. Some critics have cited the divergence of sustainability ratings as part of an argument that ESG investing as an integrated strategy should be jettisoned altogether. “Deeply flawed” is how a recent cover story in The Economist summarised it. As a solution, the story recommends a narrow approach focusing on only explicitly quantifiable metrics like emissions.

A meaningful impact requires more than one metric

Yet a narrow approach risks throwing out the baby with the bathwater. At worst, it means abandoning meaningful improvements in other areas; at best, it makes perfection the enemy of progress.