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It’s Time to Change How ESG Is Measured

It’s Time to Change How ESG Is Measured

Estimates suggest that ESG investing could exceed $50 trillion by 2025 as investors worldwide look for opportunities for their investment capital to have a broader social impact. However, research shows that ESG ratings suffer from a measurement trap, which occurs when a metric used as part of the rating is systematically biased toward certain industries or types of companies. This trap can occur in three ways: 1) The rater focuses on what can be easily measured; 2) The rater oversimplifies the attribute to be measured into an existing categorical framework; or 3) The rater attempts to distill rich multidimensional data into a single number. A two-pronged solution can improve transparency, efficiency, and effectiveness, creating a win-win-win-win scenario for firms, investors, policymakers, and the wider world.