What Is an ESG Score for Investing?

ESG scores can offer insight into whether a company values environmental, social and governance-related issues—but these scores aren't fool-proof.

Written by Jess Ullrich / October 3, 2022

Quick Bites

  • Interest in environmental, social and governance investing has grown considerably in recent years.
  • ESG scores have been developed to measure how companies are performing in these areas.
  • While these scores have some benefits, they also have some limitations to be aware of.

While a fundamental goal of investing is to earn decent returns, many of today’s investors are looking beyond potential profits when deciding where to put their money. As a result, environmental, social and governance (ESG) investing has become a very big deal. Bloomberg Intelligence estimates that ESG investments totaled $35 trillion in 2022 and are expected to climb to $50 trillion by 2025.[1]

But how is a company’s ESG performance measured? ESG scores are a common quantifier, and fund managers and investors often rely on these scores for insight. Here’s more detail about what they are and how they work.

Inside this article

  1. What is an ESG score?
  2. How do ESG ratings work?
  3. Examples of ESG scores
  4. Pros, cons of ESG scores
  5. Frequently asked questions

What is an ESG score?

An ESG score measures a company’s exposure to environmental, social and governance risks. A high ESG score may indicate that a company is considering its broader impact on people and the planet and how this impact could affect its financial performance. Companies with low ESG scores, meanwhile, may not be as focused on these issues (or could be undermining them).

ESG scoring models were developed because ESG risks can have a major impact on a company’s bottom line, though those risks weren’t previously quantified in traditional financial reports. Some factors that are generally considered in ESG scoring models include:

Environmental

  • Handling of carbon emissions
  • Response to climate change
  • Production and disposal of toxic (and other) waste
  • Selection and use of packaging
  • Use of land

Social

  • Commitment to workplace diversity
  • Handling of worker safety
  • Development of safe, high-quality products

Governance

  • Commitment to board diversity
  • Handling of executive compensation
  • Transparency around taxes and finances

How do ESG ratings work?

There’s no universal ESG scoring system, which means many different scoring models exist to help measure how publicly-traded companies are addressing ESG risks. Scoring systems have been developed by several financial and environmental data analysis companies.

Often, ESG rating systems measure companies on a numerical scale, some using higher numerical scores to designate better performance, others using lower numerical scores. Other systems may assign companies a letter grade, with AAA or A+ generally being the highest grades available. It’s also possible for the same company to have a different ESG score, depending on the scoring model used.[2]

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Examples of ESG scores

Sustainalytics, MSCI and RepRisk are three of the largest ESG data providers in the U.S., and they each have slightly different ESG scoring models.

  • Sustainalytics analyzes over 14,000 public companies and assigns them a risk rating of 0-40, with 40 being the highest risk (and lowest possible rating.)

  • MSCI looks at over 14,000 public companies and assigns them a letter grade of AAA to CCC.

Both Sustainalytics and MSCI make their scoring data publicly available. Here’s how a few popular companies scored[3-4]:

CompanySustainalyticsMSCI
Alphabet24.1 (medium risk)BBB (average)
Apple16.7 (low risk)A (average)
CVS Health22.7 (medium risk)A (average)
Microsoft15.2 (low risk)AAA (leader)
Walmart24.6 (medium risk)BBB (average)

In addition to public companies, the RepRisk model also analyzes privately-held companies. RepRisk looks at over 170,000 companies in its model, assigning them scores of 1 to 100 or AAA to D. However, RepRisk data is not publicly available.[5]

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Pros and cons of ESG scores

While ESG scores may offer some benefits, there are also some drawbacks. One of the biggest issues is the lack of a universal scoring system.

James Katz, a Chartered Financial Analyst and CEO of Humankind Investments says ESG scoring systems have “major shortcomings.”

“Rating firms struggle to come up with common standards,” says Katz. “For starters, using an ESG-based framework leaves room for doubt because the framework doesn’t tell you upfront which of its three components—E, S or G—is most important.”

Pros

  • Provides insight into company values: For instance, MSCI scores include whether a company has a decarbonization target and how aligned they are with global climate goals
  • Could help you make investment decisions

Cons

  • No standard scoring system: ESG scores can vary widely for the same company depending upon the scoring system used
  • Only one piece of the puzzle: A company with a high ESG score won't necessarily perform well financially in the long run, so these scores are only one aspect to consider before you invest

Frequently asked questions

What is a good ESG score?

Whether an ESG score is considered good or not will depend on the scoring model used. For instance, some data providers score companies on a scale of 0 to 100, with 100 being the best possible score. Others give companies a grade of A+ as you might see on a report card. Look at how scores are calculated when considering a company’s ESG ratings.

Who assigns ESG scores?
Article Sources
  1. Saijal Kishan and Natasha White, “A basic guide to ESG investing and why it faces a backlash: QuickTake,” Bloomberg, July 11, 2022, https://www.bloomberg.com/professional/blog/a-basic-guide-to-esg-investing-and-why-it-faces-a-backlash-quicktake/.
  2. Betty Moy Huber and Michael Comstock, “ESG Reports and Ratings: What They Are, Why They Matter, Harvard Law School, July 27, 2017, https://corpgov.law.harvard.edu/2017/07/27/esg-reports-and-ratings-what-they-are-why-they-matter/.
  3. “Company ESG Risk Ratings,” Sustainalytics, https://www.sustainalytics.com/esg-ratings.
  4. “ESG Ratings & Climate Search Tool,” MSCI, https://www.msci.com/our-solutions/esg-investing/esg-ratings-climate-search-tool.
  5. Anna Hirai and Andrew Brady, “Managing ESG Data and Rating Risk,” Harvard Law School, July 28, 2021, https://corpgov.law.harvard.edu/2021/07/28/managing-esg-data-and-rating-risk/.

About the Author

Jess Ullrich

Jess Ullrich

Jess Ullrich is a personal finance writer who's been creating online content since 2009.

Full bio

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