ESG Risk Ratings vs ESG Impact Ratings

Along with ESG considerations becoming increasingly paramount in investment decisions, different tools and metrics in assessing the ESG performance of companies and countries have emerged. Some of these include ESG Risk Ratings and ESG Impact Ratings. Though similar at first glance, they provide different information and purposes.

What are ESG Risk Ratings?

ESG Risk Ratings will measure companies' exposure to those ESG risks and will provide insight into how well a company manages them. Thus, it will provide the investors' understanding of what ESG factors may add to the financial impact of the company. It aims to identify well-prepared companies in dealing with ESG-related challenges and those facing potential risks.

What are ESG Impact Ratings?

ESG Impact Ratings are primarily concerned with impacts from a wider perspective: environmental impacts, social impacts, and governance implications. ESG Impact Ratings offer a rating of how well a company is performing on the dimensions of sustainability and as incentivized by ethical practice in addition to managing risks.

Comparing the ESG risk ratings and ESG impact ratings:

ESG Risk Ratings and ESG Impact Ratings are two strands that are integral to the construction of an ESG performance framework but differ in terms of their goal and insights.

Focus and Scope:

ESG Risk Ratings will thus consider the financial risks related to ESG factors as well as a company's ability to manage such risks.

ESG Impact Ratings provide a more comprehensive view of a company's overall ESG performance and impact on the environment, society, and governance.

Investor Application:

The essential use of ESG Risk Ratings for investors to identify firms with lower ESG risks, with better risk management practices, and hence more stable financial performance.

The ESG Impact Rating is being used by investors who want their investments to be aligned with their values and are supporting companies that add value to sustainable development.