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When you hear the term “ESG rating,” you may be tempted to associate it with real estate certification systems such as LEED or BREEAM that assess a broad range of sustainability factors. However, ESG ratings encompass much more than just that; so much so that they have become somewhat of a maze. This creates a headache for investors who struggle to cut through the noise and gain a clear view of a company’s performance on the sustainability front.
ESG ratings and providers employ distinct methodologies for that purpose, varied scoring scales (whether it is MSCI’s “AAA” to “CCC” letter scale, or the percentile-based 1-100 scores used by some other providers), and industry-specific comparisons. They weigh business performance and risks on an individual basis.
Regardless of whether the rating is based on a letter or number scale, the key is for companies to be aware of their actual risks and opportunities, and for capital market players to make decisions based on consistent information.
Businesses are increasingly under pressure, not only because their customer base often has elevated sustainability expectations, but also because their eligibility for receiving finance very much depends on their rating score.
Banks, which have their own ratings to consider, are increasingly wary of less sustainable projects and therefore withhold resources. In fact, according to the National Bank of Hungary (MNB), domestic banks are performing least well in the area of risk management, and the MNB is supporting players with numerous initiatives to identify the effects of climate risks.
One such is the Banking Carbon Risk Index (Banki Karbonkockázati Index or BKI, for short), which has been measuring the climate risks of the domestic banking system since 2021. According to the BKI, at the end of 2024, nearly 15% of domestic corporate loans were considered risky, meaning they were linked to high greenhouse gas intensity activities. Many view current ESG ratings with considerable skepticism due to their subjective methodology and inability to integrate available data into a final score in real-time. (However, a real-time benchmark can actually be achieved now thanks to state-of-the-art AI solutions.)
An EY analysis addresses the challenges related to these reservations. The old programmers’ “garbage in, garbage out” principle, often mentioned in connection with AI, also applies in the world of investment. According to this principle, if the quality or consistency of ESG data is questionable, it will also leave its mark on green (or at least supposedly green) investments, as it misleads the players.
As EY experts point out, investors currently have no choice but to work with fragmented information from a variety of sources, including company reports, newspaper articles, business partners, and rating agencies. To make informed decisions and prevent greenwashing, the process of ESG data integration must be accelerated. Ideally, ESG reports should achieve the same level of rigor and relevance as financial reports.
The transparency of data collection and classification also leaves something to be desired, as some rating agencies overemphasize specific ESG criteria, even though they are not equally important for all companies.
At the same time, data consistency is a sensitive issue because, although everyone is advocating for methodological consistency, it is also true that material risks can vary significantly from company to company.
“With investors trying to compare like-for-like, data consistency is another big challenge,” says EY. However, the firm adds, “There is an argument that standardization of scoring methodologies is not always appropriate since different enterprises will face different materiality of risk.”
You can add to that a lack of available ESG data: almost perversely, higher-carbon industries have better quality data available than, for example, agriculture or forestry. The latter, therefore, have a lot of catching up to do. The icing on the cake is that ESG scores are backward-looking, based on the previous year’s performance; however, it would also be beneficial to quantify the long-term future commitments of economic actors.The OECD adds to this by stating that two-thirds of the metrics used to measure ESG performance are input-based. In other words, they rely on corporate policies, objectives, and measures aimed at ESG impacts, risks, and opportunities. In contrast, the role ofthe business environment is negligible, and forward-looking metrics, which are essential for monitoring the achievement of individual goals, are largely absent from the data sets.
At the same time, there can be striking differences between assessments. In some cases, up to 28 times more indicators may be used to assess the same topic on one form than in using another methodology.
The available data is generally insufficient to measure the degree of compliance with the recommendations in the OECD guidelines, as they are based on controversial metrics that penalize companies for the mere existence of risks and for negative impacts identified in their operations and supply chains.
The European Union has taken a significant step in strengthening the transparency of rating agencies’ activities through the establishment of the Paris-based European Securities and Markets Authority’s supervisory role. However, real change can only happen if market players are also committed to sustainability out of their own internal motivation.
This demonstrates that the EU’s commitment to sustainability is unwavering. At the same time, in the United States, there is a shift back towards traditional economic policy, including a reduction in clean energy investments and the fact that, in the future, listed companies will no longer be required to report on financial risks related to climate issues.
President Donald Trump’s reversals on green issues are leading to increasing fragmentation in the U.S. market. They may also reinforce the phenomenon of greenhushing, where companies, fearing political discrimination, prefer not to showcase their ESG achievements.
In parallel, Asia is emerging as a powerhouse for green investments, led primarily by Taiwan and China. This is clearly reflected in ESG-related investments: ESG exchange-traded funds in the Asia-Pacific region are surging by 10% annually, with their volume expected to reach a record USD 50 billion this year.
Thanks to this recent surge and the continued commitment of Europeans, and despite the relative decline in the United States, Bloomberg forecasts that ESG capital market assets could reach USD 40 trillion globally by 2030.
This article was first published in the Budapest Business Journal print issue of September 5, 2025.
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