THE world of environmental, social and governance (ESG) ratings is going through a turbulent moment, with S&P Global Ratings announcing last week that it would no longer provide ESG scores in its credit ratings.

S&P said it will provide only “analytical narrative paragraphs” to describe material non-financial risks instead of scores, explaining that these paragraphs were “the most effective at providing detail and transparency”. Critics have described the move as a reaction to anti-ESG political pressure in America.

S&P’s credit rating rivals, Moody’s and Fitch, have not indicated whether they will follow.

Whatever the reason for S&P’s decision, many investors are increasingly sceptical and confused about ESG ratings. But doing away with ratings would be a step backwards. ESG risks and opportunities may be difficult to quantify, but they still matter. Fixing, not dumping, is the better way forward.

The Aggregate Confusion Projects, based in the Massachusetts Institute of Technology (MIT), has found that there is very little agreement between ESG ratings, making it extremely challenging for end-users as to which ratings to use and how to use them.

Regulators in key markets are trying to bring some order to the chaos. For example, the Monetary Authority of Singapore is seeking public feedback on a proposal for a code of conduct for ESG rating and data providers. The code is envisioned to establish “minimum industry standards of transparency in methodologies and data sources, governance, and management of conflicts of interest”.

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The first question to ask is whether ESG as a concept is still relevant. The empirical answer is yes. The MIT researchers behind the Aggregate Confusion Project found a positive correlation between ESG scores and stock returns. The latest data from Morningstar found that ESG funds in South-east Asia outperformed non-ESG funds in the second quarter of the year.

The next question is whether ratings and scores are a good way to measure ESG performance. Although ratings are highly flawed, they are still the best way to tell if one company is better on material non-financial factors than another. A qualitative narrative is useful, but it does not help an investor to perform an actionable comparison between two companies.

The problem with ratings lies with how they are derived and communicated. At a minimum, ratings methodologies and component breakdowns should be disclosed. This would allow investors – all of whom value the environmental, social and governance dimension differently – to identify ESG scoring methodologies that are aligned with their values, or to calibrate ESG scores to their own requirements.

Forcing a single methodology is not desirable either. It is not just that different investors have different value systems, such that a simple-enough single methodology is doomed to failure. The ESG space is also evolving, and ways to assess risks and opportunities in domains such as biodiversity and social impact are still being worked out. There is therefore a need to allow competition between ratings methodologies at this time.

It is more useful to standardise disclosures and definitions. Doing so will make it easier for markets to make sense of ESG ratings and to make comparisons between ratings, which would in turn improve the sophistication among investors.

ESG ratings are still highly imperfect, but they remain the most promising way for investors to compare the material non-financial aspects of issuers.