Douglas L. Peterson, president and CEO of S&P Global, has published an open letter on S&P Global’s website outlining the importance of disclosures and transparency when establishing ESG scores.

In the letter, “Transparency and Impact: The Essential Principles of ESG,” Peterson argues that while an ESG score is one “of the most important tools that companies and investors utilize to assess sustainability performance … ESG disclosures by companies can be inconsistent, leading to data gaps that need to be interpreted or modeled in order to present the most comprehensive view available at that point in time.”

Peterson contends that transparency and impact are the two essential components to an ESG score that can enhance “growth, progress on sustainable goals, and market confidence.”

While transparency is necessary to make sure that analytics can be correctly interpreted, the problem is that there are several different approaches for assessing the performance of a company against ESG criteria. This results in ESG scores being radically different from one another, which in turns leads to confusion within the market.

Peterson writes that “there must be transparency to mitigate market confusion and enhance understanding. Transparency ensures there is clarity on where and why there are differences of opinion.”

When assessing its ESG performance, the S&P Global chief emphasizes the importance of measuring the impact a company has on society and the environment. A food retailer may create positive impact by committing to sustainable agriculture practices, or a construction company could have a policy supporting a living wage for its employees.

“I believe strongly that financial markets can be a powerful force for good and that transparent and rigorous ESG scoring is an essential tool for market participants to evaluate and optimize their societal impact,” writes Peterson. “It will be impossible for ESG scores to support progress on sustainability goals if measuring impact is not an integral part of an ESG assessment.”

The letter provides readers with an opportunity to submit their comments.

Peterson recently appeared on CNBC’s “ETF Edge,” hosted by Bob Pisani, to discuss this topic. Peterson told Pisani that while there is no standardized ESG framework or methodology in the U.S., the International Sustainability Standards Board (ISSB) is the way forward for standards for disclosures and ESG metrics.

“The ISSB is a foundation, and it’s supported by governments and individual companies. It’s funded… as if it was a foundation; it has a board of directors that includes people from the public sector and the private sector. It has a relationship with the international organization of security,” Peterson said.

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