This paper critically evaluates the role of ESG ratings in steering sustainable capital flows, examining both corporate and sovereign contexts. It reviews the methodologies of major rating providers highlights divergences that undermine comparability and consistency. The study explores how ESG scores influence investor behavior and cost of capital, while often overlooking transition technologies, emerging market contexts, and the strategic role of state-owned enterprises. It argues that current frameworks disproportionately penalize sectors and geographies vital to the energy transition due to backward-looking metrics and methodological biases. The paper advocates for more forward-looking, inclusive, and transparent ESG rating systems that recognize decarbonization investments, local governance structures, and Scope 4 emissions. It concludes with recommendations to strengthen disclosure practices, regional engagement, and methodological reform to ensure ESG ratings act as enablers—rather than barriers—to sustainable finance and development. The paper includes regional insights from the Gulf Cooperation Council (GCC).
