Measuring Companies' Environmental and Social Impacts: An Analysis of ESG Ratings and SDG Scores.

Abstract

Environmental, social, and governance (ESG) ratings are central to sustainable investing and research but face criticism for inaccurately reflecting corporate sustainability performance. In response, new metrics have emerged that assess companies' impacts on the Sustainable Development Goals (SDGs). This paper compares four ESG ratings with two SDG scores, revealing no correlation between them. It then evaluates the alignment between these sustainability ratings and how investors and regulators assess corporate (un)sustainability. The findings show that SDG scores capture how these stakeholders judge companies’ negative and positive impacts on sustainable development, while ESG ratings do not. This implies that SDG scores have high, and ESG ratings low, construct validity for assessing corporate sustainability performance. These results underscore that concepts like ESG, corporate sustainability, and company impact can be used complementarily but not interchangeably. The practical implication is that sustainable investors should prioritize sustainable development impacts next to avoiding ESG risks.

Keywords: Sustainable investing, ESG, impact investing, Sustainable Development Goals (SDGs), sustainable finance, EU Taxonomy