ESG Ratings: Challenges And The Way Forward

Abstract

ESG (Environment, Social & Governance) ratings have emerged as a fundamental process that defines and assesses a firm’s overall performance, having significant implications for all stakeholders. These ratings have proved to be playing a dominant role in guiding investors to make appropriate stock selection decisions. However, a primary limitation that has emerged in ESG ratings is their inconsistency towards its three pillars: Environment, Social, and Governance. In the absence of established processes, the methodologies used by Different ESG rating providers differ to a great extent. Factors such as a lack of robust data and transparency and the urgent need to procure funding often lead to unreliable ratings for all stakeholders. For more reliable and accurate ESG ratings, it is imperative to overcome these challenges and identify a common yet holistic framework that is authentic and can be uniformly applied across various sectors