With major rating agencies producing wildly divergent scores for the same companies, a growing cohort of institutional investors is developing proprietary ESG assessment frameworks instead of outsourcing the judgement.
Key Takeaways
Ask MSCI, Sustainalytics, and S&P Global to rate the same company's ESG performance and you will frequently receive three materially different answers. This is not a marginal inconsistency of a few percentage points. Research conducted by Florian Berg, Julian Koelbel, and Roberto Rigobon at MIT's Sloan School of Management, updated in 2025, found that the average correlation between ESG ratings from different providers is just 0.61. For context, credit ratings from Moody's and Standard and Poor's for the same instrument typically correlate at 0.99. The ESG ratings market is producing assessments of the same underlying reality that are, by any statistical measure, wildly inconsistent. And yet the asset management industry has for years used these ratings as the primary inputs for ESG-oriented portfolio construction, engagement prioritisation, and proxy voting decisions.
The divergence is not random noise. It is structurally produced by three distinct sources of disagreement that the MIT research team called "scope divergence," "measurement divergence," and "weight divergence." Scope divergence arises because different providers include different categories of ESG data in their assessments. Measurement divergence occurs when providers use different proxies for the same underlying concept, such as labour practices, which one provider might measure through lost-time injury rates and another through reported fines and legal actions. Weight divergence reflects the differing importance each provider assigns to individual factors in calculating a final score. The combined effect is that a company's ESG score can move substantially simply by switching which provider's methodology you apply.
Despite years of investor complaints and growing academic attention, the divergence problem has not improved. In some respects it has widened, as providers have expanded their coverage to smaller and less-transparent issuers where data quality is lower and methodological assumptions have greater influence on outcomes. The entry of new providers into the market, including several AI-driven platforms that claim to assess ESG performance using natural language processing of public documents, has added further variation. ESMA's 2025 report on the ESG ratings market found 59 distinct providers operating in Europe alone, up from 27 in 2020, with no common methodology, no mandatory disclosure of rating rationale, and no licensing requirement for the providers themselves.
"We spent three years assuming that if we bought data from the best-regarded providers, we were getting a reliable picture of ESG risk. What we actually found, when we started building our own assessments, was that the ratings were often telling us more about each provider's methodology than about the companies themselves. That was a serious wake-up call." said the Head of Responsible Investment at a top-10 European pension fund, speaking on background.
The conflict of interest problem compounds the methodological one. Many of the largest ESG rating providers also sell consulting and advisory services to the same companies they rate, creating an incentive structure that is broadly analogous to the conflicts that contributed to the credit rating failures of 2007 and 2008. The EU and the UK have both proposed regulations requiring ESG rating providers to separate rating and advisory activities, disclose their methodologies in standardised formats, and register with financial regulators. The EU's ESG Ratings Regulation is expected to come into force in late 2026, while the UK's Financial Conduct Authority published a voluntary code of conduct in 2024 as a precursor to statutory regulation. Neither framework mandates convergence in methodology, which means divergence will persist even under a regulated regime, but both aim to make divergence more transparent and explicable.
The institutional investors building their own ESG frameworks are not abandoning third-party data entirely. Rather, they are using raw data from multiple providers and constructing their own aggregation logic, weighting schemes, and materiality filters. Norges Bank Investment Management, which manages the $1.7 trillion Norwegian Government Pension Fund Global and has been one of the most vocal critics of ESG ratings divergence, publishes its ESG framework online and explicitly states that it does not use any single provider's score in its investment or exclusion decisions. CalPERS has invested significantly in building internal ESG analytical capacity, including a team dedicated to direct corporate engagement on sustainability data quality. Schroders has published research arguing that proprietary "materiality-weighted" ESG frameworks, which assign greater weight to ESG factors that are financially material for specific industries, outperform generic scores on both predictive validity and investment returns.
The shift toward proprietary frameworks is not without costs. Building credible in-house ESG analytical capacity requires investment in data infrastructure, quantitative talent, and engagement programmes that most asset managers, particularly smaller ones, cannot readily afford. The risk is that the market bifurcates between a small number of large institutions with sophisticated proprietary capabilities and a larger group that continues to rely on flawed third-party scores, creating an information asymmetry that favours scale. Regulators and industry bodies including the CFA Institute and the Principles for Responsible Investment have both flagged this risk and called for greater standardisation of base-level ESG data, distinguishing between the raw metrics that should be standardised and the analytical frameworks that should appropriately vary by mandate.
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