Why ESG Ratings from Different Providers Disagree

Two Ratings, One Company

An investor checks a company's ESG rating from one provider and finds it near the top of its sector. A second provider rates the same company below average. Both are respected firms. Both use large teams and structured methods. They still disagree.

This is not rare. It is normal. Understanding why changes how ESG ratings should be used.

Credit Ratings Agree; ESG Ratings Do Not

Credit ratings from different agencies tend to move together, because they answer one narrow question: will this debt be repaid on time?

ESG ratings have no single question. "Sustainability" can mean carbon emissions, worker safety, board independence, data privacy, product safety or community relations, and different providers mean different things by it.

A widely cited study, "Aggregate Confusion" by Florian Berg, Julian Kölbel and Roberto Rigobon, published in the Review of Finance in 2022, compared ESG ratings from six major providers. The correlations between them ranged from about 0.38 to 0.71. Credit ratings from major agencies, by comparison, correlate at around 0.99.

Three Sources of Disagreement

The same study split the disagreement into three parts.

1. Scope. Providers choose different topics to include. One may count lobbying or electromagnetic radiation; another may not. Scope explained about 38% of the divergence.

2. Measurement. Providers measure the same topic in different ways. One may measure labour practices by policies in place; another by injury rates or legal cases. Measurement explained about 56% of the divergence, the largest share.

3. Weight. Providers give different importance to each topic. Weighting explained only about 6%.

So most of the disagreement is not about values or priorities. It is about how each provider measures the same thing.

A Worked Example: Same Facts, Different Scores

Illustrative example. Two providers rate a cement company on three topics. Both see the same facts: high carbon emissions, strong worker safety and an average board.

Provider A puts more weight on emissions and scores them harshly. Provider B weights safety more and measures emissions against sector peers rather than in absolute terms. The company looks below average to one and above average to the other, with no disagreement about the facts.

Other Reasons Ratings Drift Apart

• Company size and disclosure. Larger companies publish more, and many raters reward disclosure itself, which can favour big firms.
• Rater effects. A provider's overall view of a company can colour its scores on individual topics.
• Industry adjustment. Some providers compare companies only with sector peers; others compare across all sectors.
• Data gaps. Where a company does not disclose, raters fill gaps with estimates or penalties, in different ways.

Disagreement Has Consequences

Rating disagreement is not just an academic point. Funds that screen companies on ESG ratings can end up with very different portfolios depending on which provider they use. A company excluded by one ESG fund may be a top holding in another. Research on ESG rating divergence has also found that it makes it harder to measure whether ESG factors affect returns at all, because the answer depends on whose ratings are used.

Disagreement also changes company behaviour. If ratings reward disclosure, companies may focus on publishing more policies rather than improving performance. If each provider asks different questions, companies spend time answering questionnaires rather than fixing problems.

Agreement at the Extremes

Ratings agree more at the extremes. Companies involved in serious, widely reported controversies, such as fraud, major accidents or large environmental damage, tend to score poorly with most providers. Disagreement is greatest in the large middle, among companies with no obvious scandals, where the rating depends mostly on method. That is also where most investors' holdings are.

The Indian Context

In 2023, SEBI brought ESG rating providers under regulation through its credit rating agency rules, requiring them to register, disclose their methods and manage conflicts of interest. This makes Indian ratings more transparent. It does not make them agree, because the sources of disagreement come from method, not from oversight.

Indian disclosure is also improving through the BRSR, which gives raters more consistent data on the same KPIs. Better data can narrow measurement differences over time.

Using ESG Ratings Sensibly

1. Never rely on a single rating. Compare at least two, and treat disagreement as information.
2. Read the topic scores, not just the headline rating.
3. Check what the provider measures for the issues that matter most in that industry.
4. Go to the source data, such as BRSR disclosures, for the few topics that matter most.
5. Ask what decision the rating is for: exclusion, engagement or risk assessment each need different information.

The Reframe

An ESG rating is not a measurement of a company. It is one provider's opinion, built from its own choice of what to count and how to count it. Disagreement between ratings is not noise to ignore. It is a reminder to do the reading yourself.