ESG Ratings Strain Teams With Reporting Workload

Environmental, Social and Governance (ESG) ratings influence how investors screen and monitor companies across markets. The World Business Council for Sustainable Development (WBCSD) has examined whether these ratings support or complicate business operations as organisations manage investor expectations and reporting requirements.

According to Deutsche Bank, ESG comprises three key pillars used to measure a business's broader impact. ESG is a tool for measuring a company's exposures and progress regarding specific ESG dimensions.

The 'ESG ratings: friend or foe' report captures a WBCSD member discussion on how companies can engage with ESG ratings more pragmatically, focusing on capital access, investor relevance and operational efficiency. According to a WBCSD member, ESG ratings are evaluations provided by external agencies that aggregate information from corporate disclosures and other relevant sources to assign a score, category or opinion regarding a company's ESG profile.

Workforce implications of ratings

ESG ratings can provide early warning of incidents, controversies and emerging concerns. According to the WBCSD members, ratings can both help and hinder business targets, methods and assessments.

Stewardship, monitoring and manager oversight can be supported by ESG ratings, providing a consistent reference point. The WBCSD report states that ESG ratings are most useful when they serve as inputs into investors' internal scorecards and shape engagement priorities.

ESG ratings can help reduce information asymmetry and engagement costs for investors by standardising the identification and prioritisation of ESG issues. The ratings can also help meet explicit conditions and increase companies' valuations.

However, the report states that ESG ratings can be time and cost intensive when teams are chasing composite scores across providers. Ratings can also push teams towards policy paperwork and disclosure volume instead of physical performance outcomes.

Training burdens across teams

ESG ratings can propagate legacy errors or misclassification, harming reputations if not caught quickly enough and corrected. Ratings are less useful when corporates optimise a single provider's composite score, which is not the metric investors ultimately use.

Questions can be duplicated and annual submissions can use out of date data. The WBCSD member states that it "provides no proven valuation upside to the company."

According to a WBCSD member, ESG and sustainability reporting continue to face significant challenges due to inconsistencies in ESG rating methodologies across providers. Different agencies often assess the same company differently because they rely on varying scopes, metrics, weightings and assumptions, even when using the same publicly available information.

"For issuers, ESG is no longer a separate narrative from the credit story. It shapes how investors assess the credit narrative and ultimately influences ratings, funding strategy and market confidence," says Shoaib Yaqub, Global Head, Capital Structure & Rating Advisory, Standard Chartered. These inconsistencies are compounded by weak standardisation in ESG data itself, including differing definitions, estimation techniques and approaches to missing information.

Cross-functional coordination challenges

As a result, many investors and asset managers increasingly rely on internal scoring models and data normalisation processes rather than depending solely on third-party ESG scores. This shift places greater importance on high quality, reliable sustainability data and encourages companies to focus less on score chasing and more on strengthening internal ESG governance, controls and transparency.

The WBCSD report also highlights the growing operational burden companies face from responding to multiple ESG rating agencies and their slightly different disclosure requirements. Sustainability, finance, legal and operational teams are often required to dedicate significant time and resources to managing questionnaires and disclosure processes rather than focusing on meaningful sustainability improvements.

In many cases, ESG frameworks can unintentionally reward the volume of disclosure and the presence of policies over measurable environmental and social outcomes. "These weeks, we are doubling down on ESG training throughout the organisation and if you thought that ESG was a thing of the past, nothing could be further from the truth," writes Johanna Norberg, Head of Business Customers at Danske Bank Group, on LinkedIn.

"It is true that ESG is seen by some as a preoccupation of a bygone era when a less challenging and complex world allowed businesses to focus on doing good, rather than just staying in business. But at Danske Bank, ESG has always been first and foremost about risk management and advising our customers that a strong standing on ESG is essential for strong commercial performance," says Johanna.

To address this imbalance, companies are increasingly prioritising forward-looking sustainability metrics linked directly to enterprise value, operational resilience, climate transition planning and risk management. Examples include emissions reduction milestones, sustainable capital allocation targets, operational performance indicators and asset-level exposure data.

Another concern identified by the report is that composite ESG scores can oversimplify complex sustainability risks and trade-offs by reducing them to a single numerical rating. This can create a false sense of precision and potentially obscure material issues that investors might otherwise identify through deeper analysis.

For this reason, productive engagement between companies and ESG rating agencies should focus on improving data accuracy, clarifying context and correcting factual discrepancies rather than simply pursuing higher headline scores. Ultimately, the WBCSD report argues that companies should only invest heavily in improving a specific ESG rating when there is a clear business rationale, such as meeting lender requirements, index eligibility standards or customer expectations.

"The power is in the numbers when we reframe, refocus, reload and continue to pursue better business for a better world," says Peter Bakker, President and CEO at WBCSD. According to a WBCSD member, evolving sustainability reporting standards and regulatory requirements are significantly reshaping the ESG ratings landscape.

Frameworks and regulators are also placing greater scrutiny on ESG rating providers by encouraging more transparent methodologies and stronger conflict management practices, which may improve the consistency and usefulness of ratings over time. Despite these advances, WBCSD members note that mandatory sustainability reporting has not necessarily reduced the operational burden associated with ESG ratings.

Investors and rating agencies frequently rely on third-party data aggregators, while narrative disclosures can become overly standardised and less useful for practical decision making. At the same time, ESG rating agencies are increasingly adopting AI tools to process large volumes of disclosure data, monitor controversies and identify sustainability-related risks more efficiently.

AI systems are generally most effective when working with structured and quantitative information such as emissions data, governance metrics and standardised performance indicators. However, where disclosures remain inconsistent or lack standardisation, both AI models and investor scorecards often depend on estimates and inferred assumptions, increasing the risk of inaccuracies and misinterpretations.

The WBCSD report also highlights the growing role of AI-enabled solutions such as automated questionnaire pre-fill functions and digital tagging systems like XBRL-style reporting. These technologies have the potential to reduce repetitive disclosure requests, improve data accessibility and streamline ESG reporting processes, provided that strong governance, traceability and data integrity controls remain in place.

Nevertheless, ESG assessments involving materiality judgments, strategic trade-offs or forward-looking considerations still require human oversight, as AI-generated outputs can sometimes create a misleading sense of certainty or fail to capture important business context. To manage these risks, companies are encouraged to maintain clear records of ESG responses, ensure traceability for AI-generated conclusions and involve knowledgeable experts in reviewing context-sensitive disclosures and assessments.