Why do ESG rating agencies assign different ratings to the same company?

There is no standardized way of calculating ESG scores. An MIT study found that the ESG rating correlation among different agencies was only about 60%, compared to 99% for corporate bonds.

This happens because rating agencies weigh environmental, social, and governance factors differently. Some emphasize environmental issues; others are more focused on governance. Even the definition of good governance can vary: some agencies include corporate lobbying into ratings, others exclude it.

Moreover, environmental, social, and governance factors can conflict. A highly polluting oil and gas company can be governed well or have a diverse leadership team. For example, oil giant Exxon has three women on its Board.

Rating agencies also use different data sources and a different mix of self-reported and external data. ESG disclosures in the U.S. are voluntary and not comparable, which makes the agencies’ jobs harder.