ESG Ratings: The Road Ahead

Environmental, social, and governance (ESG) issues have become increasingly important in recent years for investors, spurring companies to be more socially responsible and open about their ESG efforts. This trend is particularly true for social issues, which have grown in prominence amid widespread concerns about race relations, law enforcement, and the pandemic.

In the absence of a structured framework to monitor firms’ ESG efforts, the burden lies on companies to communicate their initiatives and on investors to research them, often with new technologies like big data analysis or AI. However, there is a need to define a core set of variables so ESG rating agencies can report on firms’ efforts more effectively.

In this report, we highlight the need for data standardization, the importance of transparency in calculating ESG ratings, and show that a standard set of variables would partially resolve inconsistencies among rating providers.