While environmental, social and governance ratings are increasingly important for organizations, they fall short when it comes to climate change ratings, according to law professor Felix Mormann and marketing professor Milicia Mormann, PhD, in a May 24 Harvard Business Review article.
The main flaw in ESG ratings is the issue of subjective methodology that can change across rating agencies, with the same company receiving different ratings from various indices. The three factors in ESG are also very different from one another, yet the rating seeks to mold the three into one measure. This can make it unclear for investors to understand which areas of ESG a company is excelling or underperforming in.
To combat such issues, organizations should instead be assigned stand-alone climate risk ratings that take into account its carbon footprint, argue Mr. Mormann and Dr. Mormann. Given the imminent threat of climate change, these ratings would also help both investors and consumers understand where companies stand in that measure alone.
"The 'super-wicked' problem of climate change is so urgent and far reaching that it deserves its own rating," they wrote.