What ESG actually measures
Environmental, Social, and Governance (ESG) is a framework for evaluating corporate behaviour across three non-financial dimensions. It is not a single number — it is a structured lens for analysing risks and opportunities that traditional financial analysis does not capture well.
When an analyst says a company has a 'high ESG score,' they typically mean the company scores well on a composite index assembled from dozens of underlying metrics. The challenge — and the source of much confusion — is that every major rating provider assembles those metrics differently.
The most important thing to understand
ESG scores are opinions, not facts. Two equally rigorous analysts looking at the same company can produce scores that diverge by 40 points. Knowing why this happens is the first skill an ESG investor needs.
The three pillars explained
Environmental (E)
The E pillar covers a company's relationship with the natural world. This includes greenhouse gas emissions (Scopes 1, 2, and 3), energy consumption and mix, water withdrawal and efficiency, biodiversity impact, waste generation, and climate transition risk. For heavy industry, energy, and materials companies, the E score is typically the most material pillar.
- Scope 1: Direct emissions from owned or controlled sources (e.g., company vehicles, on-site boilers)
- Scope 2: Indirect emissions from purchased electricity and heat
- Scope 3: All other indirect emissions across the value chain — typically 70–90% of total footprint
- Physical risk: Exposure to floods, heat stress, drought, sea-level rise
- Transition risk: Stranded assets, carbon pricing, regulatory compliance cost
Social (S)
The S pillar covers a company's relationship with people — employees, suppliers, customers, and communities. Metrics include workforce diversity and inclusion, health and safety, labour practices, supply chain human rights, data privacy, and community impact. The S pillar has historically been the hardest to measure because much of the relevant data is qualitative, jurisdiction-specific, and self-reported.
Governance (G)
The G pillar covers how a company is run. Board independence, executive compensation structure, audit quality, anti-corruption controls, shareholder rights, and transparency of disclosure are all governance factors. Strong governance is often the precondition for meaningful E and S performance — companies with poor oversight rarely sustain environmental or social commitments over time.
Why ratings diverge across providers
A 2019 study by Florian Berg, Julian Kölbel, and Roberto Rigobon found the correlation between major ESG raters is approximately 0.54 — far lower than the 0.99 correlation between credit rating agencies. This divergence has three causes.
| Source of Divergence | What it means | Example |
|---|---|---|
| Scope | Different providers measure different attributes | One rater includes political lobbying, another does not |
| Measurement | Different metrics for the same attribute | Carbon intensity per revenue vs. per employee vs. absolute |
| Weights | Different importance assigned to each factor | One rater weights G at 40%; another weights it at 15% |
A fourth cause — which is often overlooked — is data sourcing. Some raters rely entirely on company self-disclosure. Others use satellite imagery, news monitoring, regulatory filings, and NGO reports to supplement or challenge self-reported data. The raters who challenge self-disclosure produce more meaningful but also more variable scores.
The gaming problem
Companies have learned which metrics move ratings. If a provider heavily weights carbon disclosure completeness (rather than actual carbon performance), a company can improve its score simply by publishing more data — without reducing a single tonne of emissions. Good ESG analysis distinguishes between disclosure quality and performance quality.
How institutional investors use ESG
There is no single way institutions use ESG data. The approach depends heavily on mandate, regulatory obligation, and investment philosophy. The main strategies are:
- 1Negative screening: Excluding sectors (weapons, tobacco, coal) or companies below a score threshold
- 2Positive screening / Best-in-class: Overweighting top ESG performers within each sector
- 3ESG integration: Explicitly adjusting financial models based on ESG risk factors
- 4Thematic investing: Targeting companies in specific sustainability themes (clean energy, sustainable agriculture)
- 5Impact investing: Requiring measurable, additional real-world outcomes as an investment condition
- 6Stewardship: Using shareholder rights to push for ESG improvements via voting and engagement
The data challenge
The majority of ESG data is still self-reported by companies. Until CSRD (EU) and ISSB (global) create universal mandatory frameworks, data coverage, comparability, and reliability will remain uneven. As an ESG analyst, you must understand the data quality of the source you are using.
Before trusting an ESG score, ask:
- Is this based on company self-disclosure, third-party data, or both?
- What year is the data? ESG reports often lag 12–18 months.
- Are the Scope 3 emissions included, or just Scopes 1 and 2?
- Has any of the data been externally assured by an auditor?
- How does this score change if I use a different provider?
- Does the score reflect the company's direction of travel or a point in time?
Common beginner mistakes
- Treating a high ESG score as a guarantee of ethical behaviour — it is a risk signal, not a moral certificate
- Conflating ESG with impact investing — most ESG integration does not require real-world outcomes
- Using ESG scores without understanding the methodology behind them
- Comparing scores across providers as if they are measuring the same thing
- Ignoring the controversy record — a company can score 80/100 with unresolved controversies if the score model is disclosure-heavy
- Applying the same weights to every sector — governance matters more for financials; environmental matters more for energy
How to get started with OpenESG
OpenESG provides composite ESG scores across 15 major companies with full breakdown by Environmental, Social, and Governance pillar. Each company profile includes a greenwashing risk meter, weekly ESG watch with verdict classifications, and framework alignment across GRI, TCFD, CSRD, ISSB, SASB, and more.
Start here
Go to Platform → Company Ratings and select any company. Click on a framework tab to see what data is disclosed, partial, or missing. Use the AI Intelligence Refresh to get a real-time analysis and news-based update to the score.