Rethinking ESG ratings: The hidden risks of greenwashing

Beyond the scores

ESG ratings have historically been a widely used tool for assessing corporate sustainability. These scores help investors and stakeholders identify responsible companies and allocate capital accordingly. While many critics, including us at Matter, have suggested that ESG ratings do not adequately reflect the sustainability of a company’s products and practices, new research shows that companies with good ratings in fact are more likely to greenwash their record.

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The problem: ESG scores and greenwashing risk

Several structural issues contribute to the limitations of ESG ratings:

• Lack of transparency: ESG rating methodologies are often opaque, making it difficult for investors to assess how scores are determined. New regulation in EU however requires rating providers to     disclose their methods.
• Selective disclosure: Companies can highlight their most impressive sustainability achievements while downplaying or omitting negative impacts. The emergence of new disclosure requirements (e.g. CSRD) is starting to change this.
• Incentive structures: High ESG scores can lead to financial benefits, creating an incentive for corporates to game the system rather than drive real change. This, combined with the fact that     some rating agencies charge healthy fees for advising corporates on how to improve their scores, suggest that the rating system is practically broken.
• Moral licensing: A strong ESG track record can give companies implicit permission to engage in less responsible practices elsewhere.

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The need for granular and transparent ESG data

The survey, Divergence and Aggregation of ESG Ratings: A Survey, underscores the pressing need for more granular and transparent ESG data. One of the survey’s key findings is the lack of convergence among ESG rating providers backing up a tendency that has been well-documented    for several years, since MIT’s Aggregate Confusion Project started publishing. This inconsistency stems from varying methodologies, weighting approaches, and definitions of ESG factors, making it difficult for investors to rely on a single score.

Additionally, the survey highlights the importance of harmonised disclosures and standardised ESG metrics, which would improve comparability and transparency. The weighting of ESG factors is often subjective, further complicating investment decisions. While environmental impacts can be quantified, social and governance aspects remain qualitative and harder to measure consistently. The divergence in ESG ratings can create uncertainty for investors and regulators, reinforcing the need for more reliable, standardised, and data-driven methodologies in ESG assessments.At Matter we have also analyzed and documented the issues surrounding ESGratings, for example our white paper “A House Built on Sand” from 2021.

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How investors can see beyond the scores

The research suggests that greater analyst scrutiny can help close the gap between perception and reality. When companies are more closely monitored by ESG analysts, the correlation between their real and apparent environmental performance improves, making it harder to greenwash sustainability claims.

For investors, this means:

• Looking beyond headline ESG  scores to analyse underlying data and independent third-party     assessments.
• Prioritising transparency by seeking companies that disclose  detailed, verifiable sustainability metrics.
• Utilising high-quality, timely  ESG data that reflects the most recent corporate actions rather than     outdated reports.

  If you are looking for ESGdata that provides greater accuracy, transparency, and timeliness, we would be happy to share how Matter’s solutions can help.

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_{Author: Matter}

_{Date: February 6, 2025}

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