Measuring Companies' Environmental and Social Impacts: An Analysis of ESG Ratings and SDG Scores

[The ESG ratings credibility problem 1/5]

Do ESG ratings actually measure corporate sustainability?

Jan Anton van Zanten analyses whether ESG ratings capture how sustainable a company is in his paper "Measuring companies' environmental and social impacts: an analysis of ESG ratings and SDG scores".

He compare two SDG scores from Robeco and MSCI against four ESG ratings from MSCI, Sustainalytics, Refinitiv, and S&P, covering 6,606 companies.

He then tests whether they align with exclusion lists from 28 asset owners managing over $4T, holdings of 17 sustainable thematic funds, and EU Taxonomy compliance data.

His main conclusions include:

• The four ESG ratings agree only moderately with one another, with pairwise correlations ranging from 31% to 67%. Agreement between SDG scores and ESG ratings is far weaker, reaching at most 33%.
• Companies excluded by asset owners for tobacco, coal, controversial weapons or human rights violations receive strongly negative SDG scores.
• ESG ratings from MSCI and Sustainalytics partially capture these exclusions, while Refinitiv and S&P give excluded companies higher-than-average ratings.
• Companies held in sustainable thematic funds focused on energy, water and healthcare receive strongly positive SDG scores.
• ESG ratings show weaker positive associations, and once sector and region controls are added, the effect becomes much smaller for Refinitiv and S&P.
• Companies violating the EU Taxonomy's do-no-significant-harm principle get clearly negative SDG scores, with Robeco's score dropping by 2.5 points on a seven-point scale, but ESG ratings do not consistently flag these same companies.
• A company's share of EU Taxonomy-aligned revenue rises with SDG scores but shows no meaningful relationship to any of the four ESG ratings.
• A company in one quartile of an SDG score is nearly equally likely to land in any quartile of an ESG rating.

This article shows asset managers designing SFDR Article 8 and 9 products cannot rely on ESG ratings alone to substantiate sustainability claims, as high-ESG-rated companies frequently appear on major asset owners' exclusion lists.

ESG ratings capture outside-in financial materiality, while SDG scores capture inside-out impact materiality: treating these two concepts as interchangeable creates a greenwashing risk.

The exclusion lists however come exclusively from 26 Western European and 2 Oceanian asset owners, which means the "investor preferences" benchmark reflects a narrow institutional and cultural viewpoint.