What Is an ESG Score? Importance and Who Decides It

Over the last few decades, the business world has seen a shift in how people measure company performance. Instead of simply looking at profit, investors and potential partners now consider other metrics when sizing up a business. How a company approaches environmental, social, and governance issues has become as important as expenditures, research and development, and EBITDA.

This change led to the creation of environmental, social, and governance (ESG) scores. An ESG score is now a common part of how a company presents itself not only to investors but also to the public. A strong ESG profile is increasingly tied to corporate reputation and market value, making it a metric that extends well beyond the investment community.

What Is an ESG Score?

An ESG score measures a company’s performance on environmental, social, and governance issues. It reflects how a company approaches business practices across these three categories.

Environmental — This covers how the company interacts with and affects the environment, including waste products, recycling, energy efficiency, carbon footprint, and broader sustainability issues.

Social — This considers how a company engages with the community and society. What causes does it support? What groups does it donate to? It can also include privacy practices and customer relations.

Governance — This measures corporate structure, workforce interactions, and diversity. It also includes how transparent the company is in its business practices and in the ESG scoring process itself.

Factors in an ESG score can include:

• The company’s carbon footprint
• Amount of waste products
• Energy consumption
• Employee and board diversity
• Worker safety and well-being
• Executive payroll
• Spending on charitable and political donations

While the categories remain consistent, scores can be industry-specific and measure how an entire sector deals with certain issues, or they can address broader points that affect society at a wider scale.

ESG scoring scales vary depending on the provider. S&P Global uses a 0–100 scale, where scores above 70 are generally considered strong and scores below 50 indicate poor performance. MSCI uses a letter-grade scale ranging from AAA to CCC, while Sustainalytics scores companies on a risk basis where lower numbers are actually better. Because methodologies differ, it is important to understand which provider’s framework you are looking at when evaluating a score. Regardless of the system used, companies tend to fall into three broad categories:

• Leaders — Companies with high scores who are setting the standard for sustainability
• Average — Companies in the middle of the pack, excelling in some areas while others require improvement
• Laggards — Low-scoring companies noted as needing improvement across multiple issues

Microsoft is a widely cited example of a leader in ESG, consistently earning high marks across environmental, social, and governance metrics from major rating providers. The company has been recognized for its social and environmental commitments and its focus on a sustainable future.

At the other end of the spectrum, some companies draw attention for persistently low ESG scores, often due to personnel practices, lack of transparency, or failure to disclose environmental and social data. A company that does not make its workforce or environmental statistics publicly available will typically receive a lower score regardless of its actual practices — because what cannot be measured cannot be credited.

Who Decides the Score?

Third-party organizations calculate ESG scores. Using an outside group is intended to keep the score impartial and free from company influence. Groups that conduct ESG studies include the Global Reporting Initiative, Principles for Responsible Investment, and the SASB Standards — formerly maintained by the Sustainability Accounting Standards Board, which merged into the Value Reporting Foundation and was subsequently consolidated into the IFRS Foundation in 2022.

Different scoring organizations measure ESG in various ways. Some apply industry guidelines while others use more current public metrics. CDP (formerly the Carbon Disclosure Project) is known for its investigative depth, conducting its own research rather than simply processing information provided by the company being graded.

Some organizations focus on specific scoring areas. Institutional Shareholder Services, one of the largest advisory services in the world, offers targeted categories such as carbon or water risk ratings, enabling a focused analysis of a company’s practices in those areas.

Once generated, ESG scores must be viewed in appropriate context — such as overall industry standards or environmental guidelines. Without that context, companies could be accused of greenwashing. A company might receive a high score and present its approach as cutting edge when it is actually just meeting the legal requirements of its industry.

Why Is an ESG Score Important?

Investors often seek out companies with high ESG scores and factor them into investment decisions. A high ESG score is associated with less waste, lower energy costs, and a more productive workforce — all of which make a company more attractive as a long-term investment.

The regulatory environment around ESG reporting has grown increasingly complex. The European Union has required transparent ESG disclosure for some time. In the United States, the SEC finalized climate disclosure rules in March 2024, though those rules faced immediate legal challenges and were stayed pending litigation. Meanwhile, a number of U.S. states have passed anti-ESG legislation, creating a fragmented and evolving regulatory picture for domestic companies.

ESG scores also matter when a company looks to conduct business overseas. Countries may consult a company’s rating when deciding whether to allow it to operate within their borders.

China offers a notable example of how ESG regulation is evolving globally. After years of largely voluntary reporting, Chinese regulators — including the Shanghai, Shenzhen, and Beijing stock exchanges — released mandatory ESG disclosure guidelines for listed companies in 2024, marking a significant shift toward standardized reporting.

A higher ESG score is also linked to a stronger workforce. Because employee treatment is a scored factor, better benefits, working conditions, and workplace culture tend to drive productivity. Companies with strong ESG profiles also tend to attract higher-quality applicants who want to work for organizations with positive environmental and social stances.

Beyond regulation, a high ESG score can strengthen a company’s public reputation. Transparency about business practices and values raises public perception of a brand. This connection between ESG transparency and public perception is a core part of corporate reputation management strategy.

In some circles, ESG scores are also seen as a tool for accountability. By disclosing their standards and practices, companies are required to be transparent about how they plan to be sustainable and how they respond to social issues the public considers important.

Not Everyone Is a Fan of ESG Scores

While ESG scores have grown significantly over the past decade, skepticism has grown alongside them. Critics range from investors who question the financial logic to politicians who have made ESG a flashpoint issue. By 2023 and 2024, major financial institutions had begun scaling back their public ESG commitments, several U.S. states had passed legislation restricting ESG-based investing by public pension funds, and the term itself had become politically charged.

“It’s great marketing,” Social Capital founder and CEO Chamath Palihapitiya said in an interview. “But again it’s a lot of sizzle, no steak.”

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It’s great marketing. But again it’s a lot of sizzle, no steak.

Palihapitiya expressed concern that companies may use their scores primarily to access financing, creating an incentive to inflate them. He cited examples in the European Union where a high ESG score functions as a path to favorable lending terms.

His broader concern is that ESG scores can be built on future plans and stated intentions rather than concrete actions or measurable results. This makes it difficult to distinguish genuine progress from well-packaged promises.

While supporters argue that high ESG scores and sustainability efforts lead to larger profits, other critics argue it is not the “win-win” situation being touted. Several studies published in 2023 and 2024 showed mixed or underperforming results for ESG funds relative to broader market benchmarks, lending weight to the argument that investors focused purely on returns may not find ESG strategies to be the right fit.

There have also been accusations that while companies publicly express support for ESG, the opposite is true within boardrooms. High-profile corporate exits from ESG-focused coalitions — including the Net-Zero Banking Alliance and Climate Action 100+ — have reinforced critics’ concerns that public commitments often outpace real action.

Does Your Company Need to Worry About ESG Scores?

The ESG landscape in 2024 is more complicated than it was just a few years ago. Mandatory reporting requirements have expanded significantly — particularly in the EU under the Corporate Sustainability Reporting Directive (CSRD) — while in the United States, political and corporate pushback has led some companies and asset managers to distance themselves from the “ESG” label even as they continue related practices under different names.

For small and mid-sized businesses, the practical takeaway is clear: the underlying issues ESG scores measure — environmental impact, workforce treatment, corporate transparency — are not going away, regardless of what they are called.

Knowing where your company succeeds in sustainability efforts and where it has room to grow allows you to enact positive change. This can lead to both a better score and a stronger public reputation. Understanding how corporate reputation functions as an intangible asset helps frame why ESG performance carries real financial consequences beyond regulatory compliance.

Companies that build a track record and understand the ESG scoring process early set themselves up for long-term success. That preparation can put you ahead of competitors and contribute to future growth and profitability.