Investors are increasingly using ESG ratings for their investment decisions. But we need to assign companies a stand-alone rating focused on climate risk that’s distinct from the ESG rating system. Such a climate-specific rating can distill complex information regarding a company’s carbon footprint and climate risk into an intuitive, user-friendly format, while avoiding the flaws that currently mar ESG ratings. The “super-wicked” problem of climate change is so urgent and far reaching that it deserves its own rating, one that eschews the methodological complexities and legal challenges of melding together E and S and G. A climate-specific “C-rating” would empower investors and c-suites alike to make the climate-conscious choices that markets are telling us they want.
Environmental, Social, and Governance (ESG) ratings have clearly caught the market’s attention. In 2021, over $120 billion poured into sustainable investments, more than double the $51 billion logged for 2020. When it comes to climate change, however, ESG ratings are an imperfect vehicle to convey investor-relevant information. Instead, we need to assign companies a stand-alone rating focused on climate risk. Such a climate-specific rating can distill complex information regarding a company’s carbon footprint and climate risk into an intuitive, user-friendly format, while avoiding the flaws that currently mar ESG ratings.
One prominent flaw of ESG ratings lies in the definitional and methodological variations across rating agencies.