Tesla’s removal from a major ESG index brought global attention to the inconsistencies in ESG ratings. This article explores why companies often receive conflicting scores from different agencies, breaking down the main causes—differences in scope, measurement, and weighting. It also highlights how this divergence impacts investor trust and corporate strategy.
In boardrooms, investor meetings, and sustainability reports across the globe, one acronym keeps coming up: ESG. Environmental, Social, and Governance ratings are increasingly being used to judge a company’s long-term success, risk profile, and responsibility. Yet companies often face drastically different scores depending on who’s doing the evaluating. This inconsistency isn’t just inconvenient — it’s creating confusion and raising fundamental questions about how ESG is assessed.
Tesla provides a well-known example. One of the world’s most recognized electric vehicle companies, it has undeniably helped drive the global shift toward cleaner transportation. Yet in 2022, S&P Global dropped Tesla from its ESG index, pointing to concerns around workplace issues and governance structure. Meanwhile, MSCI continued to rate Tesla highly for its environmental contributions.
The difference in these evaluations highlights the fragmented ESG ratings landscape. Different agencies prioritize different risks and indicators. For companies, the challenge isn’t just performance — it’s knowing how that performance will be judged.
The Tesla Example:
Tesla’s divergent ESG ratings stem from a variety of factors. S&P Global took issue with reported instances of discrimination at Tesla factories and raised red flags about the company’s corporate governance and public disclosures. MSCI, on the other hand, placed greater emphasis on Tesla’s contribution to reducing emissions globally through its vehicle and energy products.
Elon Musk criticized the decision openly, calling ESG ratings “a scam.” His response — while provocative — highlights a concern echoed across industries: companies often feel penalized for transparency or for operating in sectors under intense scrutiny, even as they advance sustainability goals.
Tesla’s case isn’t unique. Many companies experience similar swings in ESG scores depending on which agency is doing the assessment.
A Closer Look: Tesla’s ESG Timeline
- 2018–2021: Widely praised for innovation and sustainability leadership in transport and energy.
- 2021: Growing scrutiny over workplace culture, legal complaints, and lack of disclosures on emissions from factories.
- May 2022: Dropped from the S&P 500 ESG Index.
- Post-2022: MSCI continues to rank Tesla as a top performer in the automobile sector.
This timeline underscores how agency priorities and available data can significantly alter a company’s ESG profile.
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Another Example: Amazon’s ESG Split
Amazon has faced a similar divide. MSCI scores the company relatively well due to its energy-efficient logistics and net-zero commitments. Sustainalytics, however, has highlighted concerns including union disputes, data privacy, and workplace safety. In a Harvard Business Review comparison, Amazon's ESG ratings differed by over 40 points — enough to place it in both the best and worst ESG performer categories, depending on the agency.
Why ESG Ratings Vary So Much?
There are three primary drivers of ESG rating divergence:
1. Scope: Agencies don’t always assess the same topics. For one agency, biodiversity or water use may be central. For another, board diversity or tax transparency may matter more.
2. Measurement Methods: Even for the same issue — such as employee welfare — one agency might use reported turnover rates, another might rely on legal case history. These choices explain more than 50% of the differences across ESG scores.
3. Weighting: Each agency ranks ESG issues differently. Some weigh climate risk more heavily, others prioritize human rights or supply chain ethics. This further fragments the final score.
It’s also important to understand that most ESG scores reflect how well a company manages risks posed by ESG issues — not its actual impact on society or the planet.
Henry Fernandez, CEO of MSCI, put it plainly: “We are not in the business of telling people whether a company is good or bad. We are telling investors whether they are exposed to ESG-related financial risks.”
Why This Matters for Companies?
According to the OECD, more than 80% of institutional investors now rely on ESG ratings to guide investment decisions. ESG scores increasingly influence lending terms, procurement choices, and public perception. Yet a company could be penalized in one score and praised in another — without changing its operations.
One analysis of 900 ESG funds showed that only 12% of stock holdings overlapped. Conflicting ESG methodologies have resulted in funds labeled “ESG” investing in entirely different sets of companies.
This lack of clarity makes it harder for companies to define ESG goals, benchmark performance, or communicate progress confidently to stakeholders.
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What the EU Is Doing About It?
To reduce confusion, the European Union is introducing regulations for ESG rating providers beginning in 2025. The regulations include:
- Requiring transparency about methodology, scoring criteria, and data sources.
- Preventing conflicts of interest (e.g., banning consulting services by rating firms).
- Bringing ESG raters under the oversight of the European Securities and Markets Authority (ESMA).
The regulation won’t harmonize scores but will clarify how they are created, allowing companies and investors to better interpret them.
What Companies Can Do Now
Even ahead of regulation, companies can take proactive steps:
1. Identify the Relevant Agencies - Start by understanding which ESG ratings are most relevant to your industry and investors. Focus your disclosure and data strategy accordingly.
2. Align with Global Reporting Standards - Use frameworks such as GRI, SASB, and TCFD. A 2023 PwC study showed that companies aligning with such standards saw up to 20% improvement in their ESG scores.
3. Improve the Underlying Performance - Ratings respond to outcomes. Companies with lower emissions intensity, improved workforce diversity, and strong data privacy protections tend to perform better across multiple agencies.
4. Engage Directly With Rating Agencies - Provide clarifications, submit updates, and correct outdated or inaccurate information. Use channels offered by CDP, S&P CSA, and others to help agencies understand the full picture.
5. Explain Differences Transparently - When scores differ, use your sustainability reports to clarify why. For instance, “Our S&P rating highlights governance risks we’re addressing, while MSCI recognizes our climate leadership.”
6. Prepare for Scrutiny - Audit your ESG data systems to ensure consistency, traceability, and accuracy. This will support compliance with future regulations and reduce score discrepancies.
Putting It Into Perspective
As one CSO of a global manufacturing firm shared, “We stopped chasing scores and started focusing on what matters. Two years later, our ESG ratings improved naturally.”
Use ratings as a guide, not a goal. Improve transparency. Focus on performance. Let your strategy lead the score — not the other way around.
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