In 2022, S&P dropped Tesla from its S&P 500 ESG Index. Tesla. The company that did more than probably any other to push the world toward electric vehicles. The one whose entire business exists to decarbonise transport.

S&P's reasons? Governance shortcomings. Workplace discrimination claims. And, ironically, the absence of a formal low carbon strategy for reporting purposes. Not a low carbon strategy in practice. A low carbon strategy on paper, in the format S&P wanted to see.

ExxonMobil stayed in. So did McDonald's, a company whose global operations generated more greenhouse gas emissions than Portugal or Hungary in 2019.

The index kept the fossil fuel major. Kept the fast food giant. Cut the electric car company.

If that strikes you as absurd, it is because you are assuming ESG measures sustainability. It does not. It never did. And until more people in boardrooms and sustainability departments get that distinction right, both concepts will keep underperforming.

 

Sustainability is about what changes in the real world

 

Sustainability is a direction. It describes what a company is trying to achieve out there, in the physical world, not on a scorecard.

• Fewer emissions. Absolute reductions, not just intensity improvements.
• Cleaner water. Healthier supply chains. Ecosystems that still function for the next generation.
• Communities that benefit from a company's presence rather than subsidise its profits.

It asks one simple, difficult question: are we doing less harm and more good?

The answers are messy. Always. They involve trade offs between carbon reduction and water use, between local employment and global sourcing efficiency, between short term cost and long term viability. Serious sustainability work rarely fits neatly into a framework. That is sort of the point.

 

ESG is about what investors can see

 

ESG was built for capital markets. Full stop.

It helps investors assess how well a company identifies, manages, and discloses environmental, social, and governance risks that could affect financial performance. ESG does not ask "is this company saving the planet?" It asks: "how well is this company governed on these issues, and can investors verify it?"

Look at how the major agencies operate:

• MSCI focuses on financial materiality. A company's carbon emissions matter to MSCI insofar as they represent financial risk within that industry. In sectors where climate risk is not heavily weighted, a company's ESG rating can improve even while its emissions rise.
• S&P Global's Corporate Sustainability Assessment uses a double materiality lens but still weights disclosure quality, governance structures, and policy documentation heavily.
• Sustainalytics measures exposure to material ESG risks and how well those risks are managed. Tesla has roughly 86% of its revenue tied to climate action, yet Sustainalytics rates it medium risk and places it in the bottom half of the automobile sector because of social and governance concerns.
• CDP focuses on environmental disclosure through structured questionnaires. Strong CDP scores require specific data formats and third party verification, not just good environmental outcomes.

None of these are measuring sustainability the way your sustainability officer thinks about it. They are measuring risk management, transparency, and governance. That is not a knock on them. That is what they were designed to do.

 

Why this keeps going wrong

 

Mixing up sustainability and ESG is not just sloppy language. It creates problems you can point to.

1. Scores go up, nothing changes

Companies figure out fast that ESG scores reward reporting quality over operational change.

A 2025 OECD analysis found that ESG rating products rely primarily on input based metrics, roughly 68% of what agencies assess. These capture policies, commitments, and reported activities. Only about a third of metrics focus on what actually happened as a result. So companies invest in slicker disclosure, more granular data formatting, tighter governance documentation. Score goes up. Environmental footprint stays flat.

Here is how granular this gets. One European manufacturer ran a strong emissions reduction programme but scored poorly on Sustainalytics because a single Scope 3 data point was missing. A financial services firm had its board diversity metrics buried in a PDF appendix instead of the machine readable table format MSCI prefers. Moving the data to the right section lifted the score by a full point. The company had not done anything differently. It had just presented its data differently.

2. Good work, no credit

Meanwhile, companies doing genuinely hard sustainability work often get zero recognition for it.

Think about a mid sized food company investing in regenerative agriculture across its supply chain, redesigning packaging for circularity, funding watershed restoration near its facilities. This is expensive. It is slow. It takes years. But if the company has not:

• Disclosed it through the specific frameworks agencies assess
• Obtained third party assurance on the data
• Built the formal governance structures that ratings weight heavily

Then that work is invisible to ESG scores. The sustainability impact is real. The rating does not know it exists.

3. Teams talking past each other

This one gets less attention, but it might cause the most damage day to day.

Sustainability teams and investor relations teams end up using the same words to mean completely different things. The sustainability director says: "We need to reduce Scope 3 emissions by 30% across our supply chain." The IR lead says: "We need to move our MSCI rating from A to AA." Those may require entirely different actions. When both teams call what they do "ESG" or "sustainability" interchangeably, money goes to the wrong priorities, the board gets a muddled picture, and nobody can explain why the score does not match the effort.

 

The numbers back this up

 

A study by Treepongkaruna and colleagues examined Refinitiv ESG scores against actual carbon emissions for U.S. companies from 2005 to 2018. Firms with high ESG or environmental ratings did not have lower carbon emissions. The authors' read: these companies had already pocketed the reputational benefit of a strong score and lacked incentive to push further.

The MIT Sloan Aggregate Confusion Project showed correlations between ESG ratings from six major agencies averaged just 0.54. Credit ratings from Moody's and S&P, by contrast, correlate at 0.92. More recent data puts correlations between MSCI, Sustainalytics, and ISS ESG at around 0.42 to 0.47.

So a company can be rated a leader by one agency and mediocre by another. Not because anything about the company changed, but because the agencies define and weight their categories differently. Measurement differences alone account for 56% of the divergence, according to the MIT research. Scope accounts for 38%. Weighting, just 6%.

None of this means ESG is broken. This is ESG doing what it was built to do: each provider measures what it considers financially material, using its own model. The trouble starts when people treat these scores as if they were measuring sustainability outcomes. They are not.

 

They need each other, though

 

It would be tempting to read this far and write ESG off. Do not.

Good sustainability work, when it is properly disclosed and governed, will produce strong ESG scores. A company that cuts absolute emissions, cleans up its supply chain, and invests in community resilience will score well, as long as it tells the story in formats agencies can read. And strong ESG governance, when it drives real change in how a business operates rather than just how it reports, produces genuine sustainability outcomes. A board that takes climate risk seriously and builds it into capital allocation decisions is doing sustainability work, whether or not anyone in the room uses that word.

Where things fall apart is when one stands in for the other. When ESG becomes the strategy itself rather than the way you account for your strategy. Or when sustainability teams do serious work with no structured disclosure and then wonder why the market has no idea.

Sustainability is the strategy. ESG is how you make the strategy visible, comparable, and accountable. Get the order wrong and you end up performing one while neglecting the other.

 

The critics on each side

 

Some sustainability practitioners dismiss ESG as a financialised distraction, a way of reducing ecological urgency to a box ticking exercise for fund managers. They point to the Treepongkaruna data, to the OECD's input bias numbers. And they have a point. ESG, as currently practised, can absolutely reward disclosure over action.

Some ESG analysts dismiss sustainability claims that lack quantified, assured, comparable data. They will tell you, and they are right, that good intentions without structured reporting cannot be verified. An emissions reduction target with no baseline, no methodology, and no third party verification is just a press release.

Both camps are seeing something real. Sustainability without structured reporting is just talk. ESG without real world outcomes is just paperwork.

 

So where does that leave your organisation?

 

Most companies have never said this distinction out loud. They use "sustainability" and "ESG" as if they mean the same thing in board papers, in job titles, in strategy decks. Then they wonder why two teams keep stepping on each other.

Try something. Walk over to your IR lead and ask them what your sustainability strategy is actually changing in operations, sourcing, or product design. Then go find your sustainability director and ask which frameworks drive your MSCI or Sustainalytics score and what those agencies are really looking at. If either conversation stalls, you have found it. The gap is probably wider than you assumed, and it is almost certainly burning you on both fronts.

Name the distinction. Build it into how your people talk about this work. Let the sustainability team own outcomes. Let reporting own disclosure. And then get them in the same room, often, because neither function gets stronger in isolation.

Sustainability tells you where to go. ESG tells you whether anyone can see you getting there. Confuse them and you will end up with a high score and a flat footprint, or a transformed operation that nobody in the capital markets knows about.

Neither is where you want to be.