ESG Risk Ratings vs. ESG Impact Ratings: Understanding the Difference

ESG Risk Rating vs. ESG Impact Rating In sustainable investing, ESGs have also become an essential part to judge the greater sustainability of the companies and the ethics impact. However, the two major metrics that often crop up for the investors include ESG Risk Ratings as well as ESG Impact Ratings. Even though each tries to paint the picture of the respective ESG performance of an organization, the two appear to be applied for relatively different purposes and provide relatively different insights. This would also facilitate good decisions by the investors and help align the investment portfolios with the sustainable investment goals that they have in mind. ESG Risk Ratings ESG Risk Ratings try to identify and quantify the potential risk that a company\'s practice of ESG may face in terms of its effect on financial performance. These ratings assess a company\'s exposure to ESG-related risks and its ability to manage those risks. Basically, the aim is to review the likelihood of ESG issues negatively affecting the bottom line of the company. Features of ESG Risk Ratings: It measures the level of exposure of the firm to ESG risks, be it changes in regulation, environmental impacts, or social controversies. It is a measure of preparedness in dealing with the risk based on the company\'s policies, practices, and governance structure. It measures how much an ESG risk would cost the company, be it revenue lost, increased costs, or instability in general. Comparative Analysis: This is the ability to compare a firm\'s ESG risk profile to its peer firms within the same industry. ESG Impact Ratings ESG Impact Ratings, however, are more concerned with the positive or negative impact of a company\'s activities on the environment, society, and governance. In this sense, these ratings assess the impact and effectiveness of a company\'s ESG efforts toward real contribution toward sustainable development.