Beyond ESG: Embracing Impact Measurement for Real Sustainable Finance

The market for environmental, social, and governance investing, valued at $25 trillion in 2023 and projected to reach $40 trillion by 2030, has become a critical driver of corporate sustainability. ESG ratings from agencies such as MSCI, FTSE, ISS, and S&P Global significantly influence investment decisions and corporate strategies by guiding how businesses prioritize and communicate their sustainability efforts. However, despite widespread adoption, ESG ratings increasingly face criticism for failing to provide consistent, transparent, and actionable insights. These shortcomings raise serious concerns about their effectiveness in promoting true sustainability and their potential to enable “value washing,” where companies overstate their sustainability efforts.

A primary challenge is the variation in ESG methodologies, where differences in rating criteria and weighting lead to conflicting assessments of a company’s sustainability performance. Often, these ratings prioritize governance over the broader social and environmental impacts, leaving considerable gaps in measuring tangible outcomes for key stakeholders, including investors. With the market for sustainability data poised to exceed $2.1 billion in 2024, the urgency to address these issues is mounting.

To bridge these gaps, Impact Measurement and Management offers a promising alternative. Shifting from process-based evaluations to outcome-oriented assessments, IMM provides a framework to effectively measure and manage real-world social and environmental impacts. This article explores how IMM can complement or surpass ESG ratings, laying a more robust foundation for sustainable and impact finance. It also introduces the Value Model as an essential tool to remedy the shortcomings in both ESG ratings and existing IMM approaches, providing investors and corporations with a blueprint for aligning financial performance with measurable positive societal and environmental outcomes.

Cracks in the Core of ESG Ratings

While ESG ratings have become essential to investment decisions and corporate sustainability strategies, they frequently encounter criticisms and challenges. Although designed to provide a snapshot of a company’s sustainability performance, inconsistencies in ESG frameworks often leave investors and stakeholders with conflicting assessments or struggling with a lack of transparency in processes, weightings, and methodologies. In fact, researchers at MIT introduced the term “aggregate confusion” in 2017 to describe the significant discrepancies in scores that the same company can receive from different ESG-focused agencies due to their divergent criteria, scoring methods, and weighting systems. Seven years after the term was coined, significant improvements to ESG and sustainability ratings to support meaningful impact investing have yet to be made.

The Diverging Metrics Behind ESG Confusion

In our recent comparative analysis of various ESG rating agencies—including an in-depth assessment of the comprehensiveness of their evaluation criteria and a qualitative examination of the emphasized elements—we observed the continued fragmented nature of ESG evaluations. We analyzed the publicly available¹ methodologies from these ESG systems including 156 items from S&P, 88 from MSCI, 380 from FTSE, and 184 from ISS².  Our findings revealed MSCI focuses on resilience to financially material sustainability risks, underscoring the link between ESG ratings and financing costs. Conversely, we found S&P Global’s Corporate Sustainability Assessment significantly weights governance issues, dedicating 48% of its questions to this area, often at the expense of environmental and social dimensions. FTSE predominantly concentrates on the firm and its overall management, with 34% of its indicators related to firm-specific issues. ISS also did not evenly reflect the value of multi-stakeholders, showing considerable neglect toward socially oriented stakeholders, with low representation for society (10%), employees (8%), and partners (7%). These imbalances result in evaluations that overlook critical areas within the world’s leading ESG and sustainability reporting frameworks such as local community development, renewable energy utilization, and fair wages.

The opacity of these assessments exacerbates the issues. ESG rating agencies often use proprietary methodologies, obscuring the derivation of scores and complicating stakeholders’ understanding. This lack of transparency undermines trust in the ratings and diminishes their utility as reliable tools for impact measurement and management in sustainable finance decision-making.

¹ This study makes use of FTSE Russell data, which is accessible through a subscription agreement with Kobe University. Given the restricted public availability of the data, access to this proprietary database was a prerequisite for conducting our analysis.
² The details of this analysis are available in Nakao, et al. (2025).

Value Washing: When Perception Outpaces Reality

Within impact investing, a significant concern is the risk of value washing, which stems from ESG ratings’ focus on procedural adherence rather than tangible, measurable outcomes. For instance, our analysis reveals that the S&P Corporate Sustainability Assessment (CSA) addresses only 48% of the goals outlined in the Value Model, which synthesizes 45 of the world’s leading ESG and sustainability frameworks into a comprehensive seven-stakeholder, 27-theme, 81-goal model for sustainability measurement and management. Similarly, FTSE covers just 64% of these goals.

Our comparative analysis across the four major ESG rating agencies highlights significant gaps in addressing major stakeholder impacts, a crucial aspect for frameworks involved in impact measurement and management. When assessing the agencies’ effectiveness in safeguarding against value washing—a key risk for impact finance—the results were notably poor. For example, when we evaluated the published assessment questions from these agencies against our five-point scale³ to assess the risk potential of value washing, 76% of CSA questions scored below three points, indicating weak protections. FTSE performed even worse, averaging just two points (about 38% of its indicators), while MSCI also scored poorly, with all ratings at three or below. Further, ISS, lacking sufficient data transparency, did not allow for an adequate evaluation of its performance against these standards.

These findings highlight a significant risk of value washing in current ESG-rating models, as lower scores create opportunities for companies to overstate their sustainability efforts, whether purposefully or inadvertently, undermining the integrity of sustainable finance.

³ On this scale, five points indicate there is no risk of value washing, while zero points indicate a complete lack of safeguards against the practice.

The Cost of ESG Shortcomings for Investors

These shortcomings carry profound implications for impact investors who depend on ESG ratings to discover opportunities that align financial returns with positive societal and environmental outcomes. Inconsistencies and gaps in data significantly hinder the ability of investors to accurately measure and manage these impacts. 

As demands for accountability in sustainable finance intensify, it becomes evident that current ESG ratings systems are insufficient on their own to fully meet the needs of investors and other stakeholders committed to impact finance. There is an urgent need for tools and frameworks that focus on measurable outcomes, such as those provided by robust impact measurement and management practices, to achieve meaningful impact.

IMM: The Backbone of Sustainable Finance

As concerns over the limitations of ESG ratings grow, Impact Measurement and Management has emerged as a compelling alternative. The Global Impact Investing Network reports that the size of the global impact investing market reached US$1.164 trillion in 2022, surpassing the US$1 trillion mark for the first time. IMM involves quantifying both the positive and negative effects a company has on people and the planet, using this data to enhance business performance and decision-making. This approach not only maximizes positive impacts and minimizes negative ones but also shifts focus from merely adhering to processes and policies to achieving tangible social and environmental outcomes.

IMM represents a systematic and comprehensive method to evaluate and manage the real-world effects of investments, focusing on measurable outcomes, stakeholder impact, transparency, and accountability. Unlike traditional ESG ratings that often prioritize governance and financial risk mitigation, IMM assesses the actual effects of corporate actions, such as quantifiable reductions in carbon emissions and direct improvements in community well-being. This methodological shift integrates the concept of double materiality, acknowledging that sustainability issues impact both corporate value and broader societal outcomes. By providing robust data and clear metrics, IMM equips investors to assess impacts, align investments with global sustainability goals like the UN’s SDGs, and manage risks effectively. This outcome-oriented framework ensures that financial returns do not compromise social or environmental integrity, positioning IMM as an indispensable tool for advancing sustainable finance.

To overcome the limitations of ESG ratings, IMM offers a robust framework that enhances accountability and transparency in sustainable finance. By prioritizing measurable outcomes, IMM not only improves upon traditional ESG metrics but also sets a higher standard of integrity and effectiveness. For impact investors, IMM serves as a crucial tool to assess opportunities and strategically allocate capital for the maximum positive impact. Ultimately, IMM shifts the focus from measuring impacts to actively managing them through a goal-based approach to sustainability, ensuring more positive outcomes. However, IMM still lacks a universal system adaptable to any business, regardless of size, industry, or location. The Value Model⁴ addresses this gap by enhancing existing IMM frameworks and providing much-needed consistency.

⁴ The Value Model is available for use under a Creative Commons license through Valuufy. Additionally, its contents have been made widely available in a series of white papers through the Value Research Center at Doshisha University in Kyoto, Japan.

The Value Model: A Holistic Lens on Sustainability 

As the limitations of ESG ratings come into sharper focus, the Value Model emerges as a critical tool to complement and enhance the principles of IMM. Developed from a synthesis of over 45 leading ESG and sustainability frameworks, the Value Model provides a structured, goal-oriented approach to measuring corporate impact across seven key stakeholder groups: employees, customers, society, nature, partners, shareholders, and the firm itself. This comprehensive framework addresses the shortfalls in ESG ratings by offering a transparent, actionable methodology to effectively measure and manage sustainability outcomes.

The global business landscape has increasingly embraced a broader value-focused approach, where the true purpose of a firm extends beyond generating value for shareholders to equally serving a wider array of stakeholders. At its core, the Value Model prioritizes inclusivity and evaluates sustainability through a broader lens than many traditional ESG frameworks, which often focus primarily on governance or financial risks. For example, it accounts for environmental impacts by emphasizing carbon neutrality and resource efficiency. It measures social outcomes through initiatives like local community development, fair wages, and human rights advocacy. And, it evaluates governance within the broader context of stakeholder value creation.

By incorporating these diverse dimensions, the Value Model ensures that sustainability assessments reflect the complexity and interconnectedness of modern corporate ecosystems. This approach moves beyond traditional ESG limitations to focus on the impacts across all major stakeholder groups, making it an indispensable tool for companies aiming to achieve genuine sustainability.

Putting the Value Model to Work in Impact Finance 

The Value Model provides actionable insights that are invaluable for impact investors and sustainable finance professionals. Here are some key applications:

• Aligning investments with measurable goals: The Value Model enables investors to align their portfolios with specific sustainability objectives, such as reducing inequality or achieving carbon neutrality. By offering clear KPIs, it bridges the gap between financial performance and social or environmental outcomes.
• Improving the cost of capital assessments: As noted in an MSCI report, companies with higher ESG ratings typically enjoy a lower cost of capital. The Value Model refines this analysis by providing a more detailed assessment of stakeholder impacts, thereby enabling investors to make better-informed decisions.
• Diagnosing performance and identifying risks: Assessing the actual impacts of various stakeholders on corporations, the Value Model offers a detailed perspective that helps pinpoint both positive outcomes and areas needing improvement. This extensive analysis enables investors to detect potential risks early or spot trends indicating improvements or declines in specific environmental, social, or governance aspects.
• Benchmarking sustainability performance: The Value Model serves as a standard for comparing companies’ sustainability efforts. Its comprehensive approach not only helps investors identify industry leaders and laggards but also facilitates cross-industry and market comparisons of ESG achievements, helping to uncover risks and opportunities from a broader macro perspective.

Redefining the Future of Sustainable Finance

As the global focus on sustainability intensifies, the limitations of ESG ratings have become increasingly evident. While these ratings offer valuable insights into corporate governance and risk management, their inconsistencies, lack of transparency, and process-oriented focus hinder their ability to drive meaningful social and environmental outcomes. For impact investors and sustainable finance professionals, these shortcomings present significant challenges, including the risks of value washing and difficulties in managing measurable impacts.

The emergence of Impact Measurement and Management offers a promising path forward. By prioritizing outcomes over processes, IMM provides a robust framework for assessing and managing the real-world effects of investments. It shifts the narrative from merely “checking the box” to demonstrating tangible progress toward sustainability goals. However, even IMM must be paired with the right tools to fully achieve its potential.

Although IMM incorporates double materiality, this perspective often remains firm- or finance-centered, rooted in shareholder capitalism, and risks neglecting the broader value of key stakeholders. Local communities, employees, partners, customers, and the environment are critical contributors to long-term corporate value creation, yet they are frequently treated as external factors. Moving beyond this limited viewpoint requires a holistic approach to value creation—one that equally prioritizes all stakeholders while advancing sustainable development goals.

The Value Model offers a transformative solution. Synthesizing the strengths of over 45 global ESG and sustainability frameworks, it provides a holistic, transparent, and actionable approach to impact measurement. Its emphasis on measurable goals and comprehensive stakeholder inclusion sets a new standard for assessing sustainability performance. For impact investors, the Value Model bridges the gap between intention and action by delivering critical insights that align financial returns with societal and environmental progress.

The stakes for adopting such frameworks could not be higher. With the ESG investing market projected to reach US$40 trillion by 2030, decisions made today will shape the future of global finance and sustainability. To ensure these investments drive measurable, positive change, transitioning from ESG-centric methodologies to IMM-powered frameworks like the Value Model is essential.

As leaders in impact finance, sustainability, and corporate governance, we must champion tools that prioritize measurable outcomes and transparency. By adopting the Value Model       we can address the shortcomings of traditional ESG ratings and usher in new era of accountability in sustainable finance. The call to action is clear: we must move beyond processes and scores to focus on measurable outcomes that shape the future of sustainable and impact finance. Together, we will ensure investments deliver financial returns while driving a more equitable, sustainable, and resilient world.