Understanding ESG ratings and ESG indexes

Abstract

Every investment needs a benchmark. For environmental, social and governance (ESG) investment, this requirement seems to be particularly great given the proliferation of ESG ratings and ESG indexes in recent years. In view of the exponential growth in ESG investing and the strategic role of ESG ratings and ESG indexes, this chapter provides the general reader with a basic understanding of the current state of ESG ratings and ESG indexes and their role in the investment and business value chain. Specifically, the chapter surveys the major ESG ratings providers that have emerged through the series of consolidations in the past two decades, discusses the prevailing practices in ESG ratings methodologies and their strengths and idiosyncrasies, identifies the limitations of the present ESG ratings and indexes, and highlights the challenges as well as the opportunities for the role of ESG ratings and indexes in sustainable and impactful investing. The chapter also assesses the effect of ESG ratings and indexes, and more broadly the ESG movement, on investors, corporations, and corporate managers.

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