A recent analysis of FTSE 100 companies has prompted an interesting question about ESG ratings. According to the research, environmental factors accounted for just 5% of the overall ESG score at almost a quarter of FTSE 100 companies, despite climate-related risks continuing to dominate much of the sustainability agenda. At first glance, this feels surprising. If climate change is widely regarded as one of the defining long-term risks facing businesses, why would environmental performance appear to contribute so little to some ESG ratings?
The answer is less about whether the ratings are right or wrong, and more about what they are actually trying to measure.
There is no universal ESG rating. Different providers assess companies using different datasets, indicators and weighting methodologies. Some focus on financially material risks; others place greater emphasis on stakeholder impacts; while many vary the importance of environmental, social, and governance factors according to sector-specific risks. That means an ESG score is never simply a measure of “how sustainable” a company is. It reflects a series of methodological decisions about which issues matter most, how they should be weighted and what evidence should be included. This is one reason why the same company can receive materially different ESG ratings from different providers – something that has been widely observed across the market.
Perhaps the more interesting question isn’t why environmental factors represented a relatively small proportion of some scores. It’s whether we always understand what those scores are designed to tell us. An ESG rating might be intended to highlight financially material risks, identify governance weaknesses, support portfolio screening or compare companies within a particular sector. Those are all legitimate objectives, but they are not the same objective. Understanding the purpose of a rating is often just as important as understanding the rating itself.
For investment teams, ESG scores remain an important analytical tool. They help prioritise research, identify emerging risks and flag areas that may warrant closer attention. What they rarely provide is the full explanation.
A headline score cannot reveal why management has made certain strategic decisions, how sustainability considerations influence capital allocation or whether recent improvements reflect genuine operational change or simply better disclosure; that requires a broader evidence base.
Company reporting, governance analysis and direct engagement all help investors move beyond the headline number and build a more complete understanding of long-term risk and opportunity. In many respects, ESG ratings are less an endpoint than the beginning of the analytical process.
This is where stewardship becomes particularly valuable. If a rating raises questions, engagement provides an opportunity to explore them. Why has one provider’s assessment changed while another’s has not? How are climate risks influencing investment decisions? Does management agree with the assumptions embedded within external ratings? What evidence sits behind the published disclosures? These conversations often reveal nuances that a single score cannot capture. Rather than replacing ESG ratings, engagement helps investors understand what sits behind them.
The continued development of sustainability reporting standards should also strengthen the information available to investment teams. The UK Sustainability Reporting Standards (UK SRS) S1 and S2 were published for voluntary use in February 2026, providing an endorsed reporting framework aligned with the ISSB standards. The Financial Conduct Authority has also consulted on incorporating UK SRS into its disclosure requirements for listed companies, with implementation proposed from 2027, subject to the outcome of the policy process.
More consistent reporting will not eliminate differences between ESG ratings, nor should it. Providers will continue to make different methodological choices. What it should do is improve the quality and comparability of the underlying evidence on which those assessments are based.
The recent FTSE 100 analysis is not necessarily a criticism of ESG ratings – if anything, it is a reminder to look more closely at what they are designed to measure. For investors, a single score is rarely the conclusion, but a signal. One that can prompt further research, better questions and more informed engagement. As sustainability data continues to evolve, understanding the methodology behind the score may prove just as valuable as the score itself.
