ESG Ratings Explained: What They Mean for Vegans

Open any investment platform and you'll see ESG ratings everywhere. Morningstar globes, MSCI scores, Sustainalytics ratings. But what do these numbers actually mean? And should vegans trust them?

What ESG Ratings Measure

ESG stands for Environmental, Social, and Governance:

Environmental:

• Carbon emissions
• Energy efficiency
• Waste management
• Water use
• Climate strategy

Social:

• Worker treatment
• Supply chain standards
• Community relations
• Product safety
• Diversity and inclusion

Governance:

• Board structure
• Executive pay
• Accounting practices
• Shareholder rights
• Business ethics

Each rating agency combines these factors into scores, often presented as letter grades (AAA to CCC) or numerical ratings.

The Problem for Vegans

Here's the issue: standard ESG ratings don't adequately address animal welfare.

A company can score highly on ESG while:

• Operating factory farms
• Testing on animals
• Producing meat and dairy
• Manufacturing leather goods

Why? Because animal welfare is typically a tiny component of the "Social" pillar, often limited to basic welfare standards rather than exploitation itself.

Example: A major meat company Could score well on ESG due to:

• ✅ Good worker safety programs
• ✅ Renewable energy at facilities
• ✅ Strong governance practices
• ❌ But still operates slaughterhouses and factory farms

For vegans, this makes generic ESG ratings insufficient.

Major ESG Rating Providers

MSCI: Rates companies AAA to CCC. Widely used by funds. Does include some animal testing considerations but not comprehensive animal agriculture exclusions.

Sustainalytics: Risk-based approach. Lower scores = lower ESG risk. Animal testing has a category, but factory farming isn't systematically captured.

Morningstar: Globe ratings (1-5). Based on holdings' underlying ESG scores. Same limitations as the ratings it aggregates.

ISS: Focuses on governance more than environmental/social. Useful for some purposes but not animal welfare.

CDP (Carbon Disclosure Project): Specifically environmental. Good for climate but doesn't address animal issues at all.

How to Use ESG Ratings

Despite limitations, ESG ratings can still be useful for vegans:

What they're good for:

• Identifying companies with good governance (less likely to have scandals)
• Finding climate leaders and laggards
• Spotting poor worker treatment
• Comparing companies within sectors

What they're NOT good for:

• Identifying vegan-friendly investments
• Ensuring no animal agriculture exposure
• Comprehensive ethical screening
• Replacing your own values-based analysis

Best approach: Use ESG ratings as one input, but don't rely on them alone. For vegan investing, you need explicit exclusionary screening in addition to ESG analysis.

Questions to Ask About Any "ESG Fund"

When evaluating funds marketed as sustainable or ESG:

1. What does it actually exclude?

• Does it name animal agriculture specifically?
• What about animal testing?
• What revenue thresholds apply?

2. What methodology does it use?

• Exclusion (removes entire sectors)?
• Best-in-class (keeps "better" options in every sector)?
• Engagement (holds problematic companies to change them)?

3. Who decides what's in?

• Independent committee?
• Fund manager discretion?
• Mechanical rules?

4. How transparent are holdings?

• Can you see every holding?
• How often is it updated?

Vegan-Specific Screening

At Vegan Invest, we go beyond standard ESG:

Our additional screens:

• Explicit animal agriculture exclusion
• Animal testing exclusion (beyond just cosmetics)
• Animal entertainment exclusion
• Animal-derived materials exclusion
• 5% revenue threshold (stricter than typical ESG)

We use ESG data where it's helpful (governance, environmental practices) but add our own vegan-specific analysis on top.

The Future of Ratings

The ratings industry is evolving:

Positive trends:

• More specific issue ratings (beyond aggregate scores)
• Better animal welfare data
• Increased regulatory requirements for disclosure
• Growing demand for truly ethical products

Continuing challenges:

• Different providers often disagree on scores
• Methodologies vary widely
• Data quality issues persist
• Animal exploitation still under-represented

Until ratings catch up, vegans need specialised screening rather than generic ESG products.

Taking Action

If you're evaluating investments for vegan alignment:

1. Don't trust ESG labels alone - check what's actually excluded
2. Look for explicit animal exclusions - not just animal welfare policies
3. Check holdings yourself - are there any food/pharmaceutical companies?
4. Ask providers directly - what's their screening methodology?
5. Consider specialist providers - like Vegan Invest with dedicated vegan screening

Generic ESG is better than nothing, but it's not enough for truly vegan investing.

Want investing that goes beyond generic ESG? See our vegan-screened portfolios.