Climate risks are material financial risks. 

Yet, for years, the dominant response has been reactive: Responding to climate shocks as they happen and relying heavily on ESG reporting to demonstrate compliance.

This checklist mindset is losing both relevance and credibility for investors and issuers, in the face of today’s complex climate realities.

Scientific Climate Ratings (SCR), an EDHEC venture, offers a science-led alternative that translates robust climate research into decision-useful financial insights.

Five Limitations of ESG Ratings

ESG ratings have become a central framework for compliance, but do they provide the clarity needed for informed long-term investment decisions?

Here are five critical gaps in the ESG checklist approach and how our ratings offer a scientific alternative for climate risk assessments:

1- Not Forward-Looking

ESG ratings don’t model different climate scenarios or estimate interconnected future exposures. They primarily describe the past and today and they don’t estimate interconnected exposures that will shape tomorrow’s financial outcomes.

2- No Actionable Climate Metrics

ESG frameworks often fail to quantify potential losses, damages, or risks associated with physical or transition climate shocks. They are mostly compliance-driven and purely defensive, and they aren’t built on scientific forecasts or robust financial modelling.

They lack the analytical depth investors need for well-informed decision-making.

3- Lack of Scientific Precision

ESG ratings are subjective and often inconsistent across different rating providers.

A company can be labelled an “ESG Leader” and an “ESG Laggard” simultaneously, depending on the ESG rating agency and what it is assessing. This limitation often creates confusion rather than clarity.

4- Too Broad, Lacks Focus

ESGs rate too many different risk dimensions (e.g. Environmental, Social and Governance), which leads to a lack of focus (unlike credit ratings).

We want to focus on one single thing: the financial materiality of climate risks.

5- Ideology Overrides Science and Rigour

These scores often reflect reputational or ethical considerations rather than systemic, science-led risk assessments.

This limitation creates a breeding ground for greenwashing. Companies can make bold pledges while doing very little to back them up. Most “climate-aligned” portfolios fail to deliver real-world emission reductions.

There is a difference between “doing good” and “feeling good”.

An Evidence-Based Alternative: Scientific Climate Ratings

The financial community needs to move beyond these limitations.

Investors and issuers require evidence-based tools grounded in transparent, rigorous, and independent scientific research to quantify the financial impact of climate risks. 

Scientific Climate Ratings, an EDHEC venture, addresses these needs directly.

Our approach combines advanced climate science with in-depth financial analytics to provide:

• Independent, evidence-based risk ratings
• Both physical and transition risks assessed
• Transparent and robust metrics in both monetary and relational terms for financial risk
• Simulations under multiple climate scenarios and timeframes
• ClimaTech: The most extensive database of adaptation and resilience strategies
• Geospatial risk analysis

Is your current approach to climate risk giving you the insights you need to thrive?

Now you know.