What Is an ESG Rating?

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

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.

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Data source: MSCI.

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Laggards have relatively more unmanaged exposure to ESG risk factors than their peers. Average ESG performers have mixed performance. They may be managing some key ESG issues well, or they may be average across the board. Leaders are proactively managing ESG risk and optimizing ESG opportunities better than their peers.

ESG score data sources

MSCI uses public data sources to measure ESG exposure. These sources include company 10-Ks, sustainability reports, and proxy reports, plus thousands of monitored media outlets and data from governments, regulatory organizations, and NGOs. MSCI also works directly with corporations to validate the information collected.

ESG rating reliability

ESG ratings have been making the news recently for a lack of transparency in data sourcing. ESG ratings are a useful tool only if they are data-backed, reliable, and objective. While that remains largely the case, recent events have called that into question.

One major event is the war in Ukraine, where environmental and social values are colliding. Europe is loosening climate objectives and reverting to fossil fuel use to ban Russian oil, leading to increased fossil fuel use across business sectors.

Simultaneously, Russian-backed Sberbank (ETR:SBNC)(AKSJ.F) has sparked outrage since it was highly rated by both MSCI ESG research and Sustainalytics as of December 2021. The bank scored especially well on data security and governance compared to Western lenders.

MSCI and Sustainalytics have now downgraded or suspended Sberbank and other Russian government-backed companies. Investors are calling for an overhaul in how geopolitics and human rights factor into ESG ratings.

Meanwhile, a working paper from the European Corporate Governance Institute found that a significant number of ESG rating agencies were downgrading ESG scores retroactively. The findings call into question the reliability of ESG ratings and may reduce investor confidence.

In better news for ESG integration in mainstream finance, the UK’s Financial Conduct Authority (FAC) stated in June 2022 that it has a clear rationale for regulating ESG ratings. ESG rating standardization means greater transparency and standardization for investment decisions.

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Image source: Getty Images.

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ESG ratings for more informed investing decisions

The best ESG stocks in 2022 and the six best ESG ETFs put together companies that have sustainable business practices and deliver outstanding financial returns. You don't have to be committed to sustainable investing to value the role ESG review plays in the investment process.

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Institutional Investor

An institutional investor is a professional organization or company that invests money on other people's behalf. Here's what you need to know about institutional investing.

ESG scores help you find lower-risk, higher-return stocks, and that's an outcome most investors, from institutional investors to retirement savers, can appreciate.

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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.

What Is an ESG Rating?