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CS Professional · Environmental, Social and Governance (ESG) - Principles and Practice · Sustainability Audit, ESG Rating and Emerging Mandates from Government and Regulators

Veda Textiles Ltd, a listed company, finds that two ESG rating providers have given it very different scores for the same year. The CFO says this is because each provider uses its own indicators, weights and data sources. Which statement best describes this feature of ESG ratings?

Different ESG scores for one company mainly reflect the absence of a single standard methodology. Each provider selects its own indicators, weights and data sources, so ratings can diverge without any error or illegality, and the company should study each methodology before reacting.

  1. AIt shows the ratings are illegal because all providers must use one identical formula
  2. BIt reflects the lack of a single standard methodology, so ratings from different providers can divergeCorrect
  3. CIt proves that one of the providers has certainly made an arithmetic error
  4. DIt means ESG ratings are fixed by the company's board and not by the providers

Explanation

ESG rating providers choose their own metrics, weightings and data inputs, so scores for the same company can differ. Divergence therefore does not by itself indicate error or illegality. Option A is wrong because no single formula is mandated for all providers.

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