What Is an ESG Rating?

By Kristi Waterworth – Updated Aug 7, 2025 at 9:32 PM

Key Points

ESG ratings analyze a company's management of environmental, social, and governance risks.
Investors can integrate ESG ratings with financial analysis to assess long-term risks and opportunities.
High ESG scores indicate effective risk management, impacting investment decisions and potential returns.

An ESG rating measures a company's exposure to long-term environmental, social, and governance risks. These risks -- involving issues such as energy efficiency, worker safety, and board independence -- have financial implications. But they are often not highlighted during traditional financial reviews. Investors who use ESG ratings to supplement financial analysis can gain a broader view of a company's long-term potential.

Here's a closer look at ESG ratings, including how companies are scored and how these ratings affect you and your portfolio.

What does an ESG rating mean?

A good ESG rating means a company is managing its environment, social, and governance risks well relative to its peers. A poor ESG rating is the opposite -- the company has relatively higher unmanaged exposure to ESG risks.

Along with ESG reporting, ESG ratings help investors understand a company's priorities and the long-term risks it could face in the future.

One of the most widely referenced ESG rating systems is the MSCI ESG score. MSCI scores roughly 8,500 companies and more than 680,000 fixed-income and equity securities globally, including ESG funds.

The foundation of the MSCI ESG score is a key issues framework that measures risk across 10 categories of environment, social, and governance areas.

Considerations for the environmental score

MSCI's key environmental issues fall under the categories of climate change, natural capital, pollution and waste, and environmental opportunities.

Climate change issues include:

Carbon emissions.
Product carbon footprint.
Financing environmental impact.
Climate change vulnerability.

Natural capital issues are:

Water stress.
Biodiversity and land use.
Raw material sourcing.

The pollution and waste category encompasses:

Toxic emissions and waste.
Packaging material and waste.
Electronic waste.

Environmental opportunities are:

Clean technology.
Green building.
Renewable energy.

Considerations for the social score

Social score issues fall into four categories: human capital, product liability, stakeholder opposition, and social opportunities.

Human capital issues are:

How labor is managed.
Health and safety practices and protocols.
Worker training.
Supply chain labor standards.

Product liability areas of focus include:

Product safety and quality.
Chemical safety.
Consumer financial protection.
Privacy and data security.
Responsible investing.

Stakeholder opposition includes:

Controversial sourcing.
Community relations.

Social opportunities are:

Access to finance.
Access to healthcare.
Opportunities in nutrition and health.

Considerations for the governance score

MSCI breaks governance into two categories: corporate governance and corporate behavior.

Corporate governance includes:

Composition of the board in terms of diversity and independence.
Executive compensation.
Ownership.
Accounting practices.

Corporate behavior encompasses:

Business ethics.
Tax transparency.

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Data source: MSCI.
Comparative Performance	ESG Rating	Numerical Score
Leader	AAA	8.571-10.000
Leader	AA	7.143-8.571
Average	A	5.714-7.143
Average	BBB	4.286-5.714
Average	BB	2.857-4.286
Laggard	B	1.429-2.857
Laggard	CCC	0.000-1.429

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Image source: Getty Images.

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About the Author

Kristi Waterworth has been a contributing real estate and financial expert at The Motley Fool, covering real estate, investing, and personal finance topics, since 2020. Kristi has been interviewed by various TV media outlets and podcasts for her real estate investing expertise – from residential real estate to digital real estate and everything in between. Kristi’s journalist career spans over 25 years, and she has written about real estate investing, homeownership, and home construction specifically for the last decade. She was also previously a licensed Realtor and general building contractor before the Great Recession and housing market collapse. She holds a bachelor’s degree in American history from Columbia College in Missouri.

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Kristi Waterworth has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.