2025 Bay Area Sustainability Blueprint: Divergence, Use, and Practices of Sustainability Index and Ratings

Roundtable Reflections:

In our Bay Area Sustainability Blueprint Series, on March 19th, our institute collaborated with Caijing Dushu to host a closed-door workshop focused on “Divergence, Use, and Practices of Sustainability Index and Ratings.” The workshop examined the challenges of applying ESG ratings in real-world contexts, bringing together renowned scholars specialising in sustainability index research and representatives from financial institutions. Academic experts presented case studies highlighting differences in rating frameworks and indicators, while industry representatives shared their challenges in using sustainability data for investment decisions. The workshop explored potential strategies for optimising rating models through collaborative efforts between academia and industry, aiming to enhance the value of ESG indices and data.

Issues Addressed

How do investors utilise ESG ratings and indices in practice?
Do the ratings accurately reflect a company’s sustainability capabilities? Does higher rating result consistently correlate with better financial performance?
What challenges arise when using ESG ratings? And how do these issues impact investment decision-making?
Is the market’s response to ESG ratings overly optimistic or pessimistic?
How do ESG ratings influence corporate strategies and operations? Do their ESG actions are “rating-driven” or striving for “substantive improvements”?
How do scholars see ESG indices and ratings?
How are international and domestic regulations driving companies to improve information disclosure and data quality? And meanwhile, how are rating agencies adapting to the evolving regulatory requirements?
How could academic research contribute to index and ratings with innovative perspectives or potential solutions?

Key Takeaways

Sustainability disclosure is becoming increasingly standardised and mandatory worldwide, yet notable divergence persist between domestic and international frameworks. Third-party rating agencies exhibit divergent priorities, particularly in social dimension indicators, data collection mechanisms, and weighting methodologies. Enhanced transparency is critical for informed decision-making.
Improving data quality remains a central challenge for ESG ratings. A robust data foundation is regarded as a pivotal breakthrough for the optimisation of rating and indices. Given that the ESG data disclosure of Chinese listed companies is neither comprehensive nor uniform in quality, regulatory authorities have been enhancing policy guidance to improve the quality of disclosures. The existing ESG rating systems still exhibit deficiencies in methodology, data transparency, and evaluation criteria. In the future, there is a need to construct a “white box” rating system that is both scientifically rigorous and transparent—one that aligns with international standards while also taking into account the unique characteristics of the Chinese market.
Sustainable investment decision-making relies on the integration of multidimensional information. Compared with Europe and the U.S., China’s sustainable investments prioritise Alpha generation over risk management, with stronger market preference for thematic ESG products. This reflects the characteristics in specific stage of market development, and underscores the need for public education on ESG frameworks. Future opportunities lie in leveraging text analytics and algorithms to extract predictive ESG signals from public disclosures for portfolio construction.
Investors seek to understand the specific methodologies and data sources behind ratings to better interpret ESG signals, thereby reducing the risk of information asymmetry in their investment decisions. While asset managers purchase ESG ratings, they prioritise analysing underlying data over relying on final scores. Investors demand transparent, traceable raw data to develop customised internal rating systems, and adjust strategies considering the sector-specific and risk preferences.
Researchers in our institute have been leveraging their research expertise to advance sustainability indices with innovative approaches:
- Prof. Guojun He: Eliciting public preferences on various ESG dimensions
- Prof. Hailiang Chen: Leveraging advanced data analytics techniques in ESG information
- Prof. Sara Kim & Prof. Tuan Quang Phan: Addressing the gap between consumer perceptions and corporate actions
- Prof. Chao Ren: Measuring carbon footprints (Scope1, 2, 3) at the community level
- Prof. Alan Kwan: Measuring the intensity of a firm’s attention to specific ESG issues

Closing Remarks

Sustainability indices and ratings are becoming increasingly significant in the business environment, serving as crucial references for investment and decision-making. However, the rating systems still face challenges in standardisation and transparency, affecting their credibility. The advancement of sustainable investment and practices relies on the collective efforts of regulators, industry players, and academia. We look forward to more deep dialogues with industry experts and will keep sharing the latest research findings from academic scholars.

About the Events

The Greater Bay Area emerges as a key player in the global ESG landscape by advancing sustainable development through multi-sector collaboration, green finance innovation, and regional integration.

Our Greater Bay Area development blueprint theme will feature a series of events, inviting distinguished academics and industry guests to discuss the practical issues encountered in promoting sustainable development in the Greater Bay Area through seminars, closed-door discussions, etc. In this session, we invited academic guests to share research frontiers and gather an understanding of the challenges encountered by data users (namely financial institutions). In the next session, we will invite ESG data providers to discuss the issues of the current methodology and areas for improvement, addressing pain points and promoting the “white box” of sustainable development indices and ratings. Please stay tuned for our sharing sessions in April!