Explainer: Sustainable finance data & ESG ratings reform — what it is, why it matters, and how to evaluate options

When the same company can receive an ESG rating of "AA" from one provider and "CCC" from another, something is fundamentally broken in sustainable finance. A 2024 MIT Sloan study found correlations between major ESG rating providers hover around just 0.54—compared to credit ratings, which correlate at 0.99. This divergence isn't merely academic: it represents over $35 trillion in global sustainable investment capital flowing based on fundamentally inconsistent signals. For US institutional investors, asset managers, and corporate sustainability officers, understanding how to navigate ESG data quality, emerging standards, and the pervasive problem of "measurement theater" has become essential to credible climate action and regulatory compliance.

Why It Matters

The sustainable finance data ecosystem sits at a critical inflection point. Global sustainable investment assets reached $35.3 trillion in 2024, with US-domiciled assets accounting for approximately $8.4 trillion according to the Global Sustainable Investment Alliance. Yet the infrastructure supporting these capital flows—ESG ratings, climate disclosures, and impact metrics—remains plagued by inconsistency, opacity, and methodological fragmentation.

The stakes are rising rapidly. The SEC's climate disclosure rule, finalized in March 2024, requires public companies to report material climate risks and Scope 1 and 2 greenhouse gas emissions in audited filings. California's SB 253 and SB 261, enacted in 2023, mandate comprehensive emissions reporting and climate risk disclosures for companies doing significant business in the state, affecting over 5,000 entities. These regulatory developments mean that data quality is no longer optional—it directly impacts legal liability, investor relations, and market access.

The economic consequences of poor ESG data are substantial. A 2024 Harvard Business School analysis estimated that ESG rating disagreement costs investors between 1.8% and 3.2% in annual alpha due to mispriced risk and missed opportunities. For corporations, inconsistent ratings create confusion about which sustainability investments will be recognized by the market, potentially misallocating billions in capital expenditure annually.

Perhaps most concerning is the phenomenon of "measurement theater"—the performance of sustainability accounting without genuine impact. A 2025 survey by the Sustainability Accounting Standards Board (SASB) Foundation found that 67% of corporate sustainability professionals admitted their organizations reported metrics primarily for compliance or reputation rather than strategic decision-making. This disconnect between reporting and action undermines the fundamental premise of sustainable finance: that better information enables better capital allocation toward genuine environmental and social outcomes.

Key Concepts

Sustainable Finance refers to the integration of environmental, social, and governance factors into financial decision-making, encompassing ESG investing, green bonds, sustainability-linked loans, and transition finance. Unlike traditional finance focused solely on risk-adjusted returns, sustainable finance explicitly considers externalities and long-term systemic risks. In the US context, sustainable finance has evolved from niche socially responsible investing to mainstream institutional practice, with over 70% of US institutional investors now incorporating ESG factors according to a 2024 Morgan Stanley survey.

Impact Measurement describes the systematic assessment of the environmental and social outcomes generated by investments or corporate activities. Effective impact measurement requires establishing causality between financial activities and real-world changes, measuring outcomes (not just outputs), and accounting for what would have happened absent the intervention. The challenge lies in moving beyond easily quantifiable metrics like carbon emissions to harder-to-measure outcomes like biodiversity preservation, worker well-being, and community resilience.

Blended Finance structures combine concessional capital from public or philanthropic sources with commercial investment to de-risk opportunities and attract private capital to impact-oriented projects. In the US, blended finance mechanisms have deployed over $12 billion since 2020 through vehicles like green banks, Qualified Opportunity Zone funds with sustainability mandates, and public-private infrastructure partnerships. Understanding blended finance is essential because it often represents the bridge between projects that can demonstrate impact and those that can achieve commercial returns.

CSRD (Corporate Sustainability Reporting Directive) is the European Union's comprehensive sustainability disclosure framework that took effect in 2024. While an EU regulation, CSRD has profound implications for US companies with European operations, subsidiaries, or significant EU revenue (>€150 million). The directive requires reporting under the European Sustainability Reporting Standards (ESRS), covering environmental, social, and governance topics with unprecedented granularity. US multinational corporations are increasingly adopting CSRD-aligned reporting globally to streamline compliance and meet stakeholder expectations.

Unit Economics in sustainable finance refers to the per-unit cost and return of sustainability interventions, enabling comparison across different approaches. For example, the cost per ton of CO2 abated, the return per dollar of social impact created, or the payback period for energy efficiency investments. Rigorous unit economics analysis helps distinguish genuinely efficient sustainability investments from expensive virtue signaling, and is increasingly demanded by sophisticated investors evaluating ESG funds and green bonds.

Additionality is the principle that an investment or intervention produces outcomes that would not have occurred otherwise. In carbon markets, additionality determines whether a credited emissions reduction is genuine or would have happened anyway. In sustainable finance more broadly, additionality assessment asks whether ESG-labeled capital is actually shifting outcomes or simply relabeling business-as-usual investments. A 2024 analysis by Carbon Direct found that up to 35% of corporate carbon offset purchases failed rigorous additionality tests, highlighting the importance of this concept for credible climate finance.

What's Working and What Isn't

What's Working

Convergence Around ISSB Standards: The International Sustainability Standards Board (ISSB) issued its inaugural standards (IFRS S1 and S2) in June 2023, and adoption is accelerating. By late 2024, over 20 jurisdictions representing 55% of global GDP had committed to requiring or permitting ISSB-aligned disclosures. In the US, the SEC's climate rule drew heavily on ISSB frameworks, creating functional alignment. This convergence is reducing the "alphabet soup" of competing frameworks and enabling more comparable disclosures across companies and geographies.

Technology-Enabled Data Collection: Satellite monitoring, IoT sensors, and AI-powered analytics are transforming ESG data from self-reported estimates to independently verified measurements. Companies like Planet Labs provide weekly satellite imagery that can verify deforestation claims, while Persefoni and Watershed have built software platforms that automate emissions calculations from enterprise data. A 2024 CDP analysis found that companies using automated emissions tracking tools reduced data errors by 43% compared to spreadsheet-based approaches.

Regulatory Enforcement Creating Accountability: The SEC's Climate and ESG Task Force, established in 2021, has brought over 20 enforcement actions against misleading sustainability claims through 2024. This regulatory pressure has meaningfully improved disclosure quality—a 2025 analysis by Intelligize found that climate risk disclosures in 10-K filings increased in length by 156% and in specificity by 89% between 2021 and 2024. European regulators have been similarly active, with ESMA issuing fines totaling €47 million for greenwashing in investment fund marketing during 2024.

Investor Coalitions Driving Standardization: Investor-led initiatives like Climate Action 100+, representing over $68 trillion in assets, have successfully pushed major emitters toward consistent climate disclosure and transition planning. The Net Zero Asset Managers initiative, with 325 signatories managing $57 trillion, has created market demand for comparable, decision-useful ESG data. These coalitions demonstrate that investor coordination can accelerate standardization faster than regulatory processes alone.

What Isn't Working

Persistent Rating Divergence: Despite years of industry consolidation and methodology refinement, ESG rating divergence remains severe. The same company can be classified as a sustainability leader by one rater and a laggard by another due to differences in scope (which issues matter), measurement (how issues are quantified), and weighting (how issues are aggregated). This divergence enables companies to cherry-pick favorable ratings while undermining investor confidence in ESG signals. Efforts by IOSCO and the EU to regulate ESG rating providers have progressed slowly, with comprehensive oversight frameworks not expected until 2026.

Scope 3 Data Gaps: While Scope 1 and 2 emissions reporting has improved substantially, Scope 3 emissions—which typically represent 70-90% of a company's carbon footprint—remain unreliable. A 2024 analysis by the Environmental Defense Fund found that corporate Scope 3 disclosures varied by up to 500% for identical supply chains depending on methodology choices. The SEC ultimately excluded mandatory Scope 3 reporting from its final climate rule due to data quality concerns, creating a significant blind spot for investors seeking comprehensive carbon exposure assessments.

Greenwashing in Sustainable Fund Products: The explosion of ESG-labeled funds has outpaced genuine differentiation. A 2024 study by InfluenceMap found that 55% of climate-themed funds held investments inconsistent with Paris Agreement temperature goals. Morningstar reported that US sustainable fund assets reached $323 billion in 2024, but reclassifications and downgrades due to failing EU SFDR Article 9 standards affected over $100 billion in global AUM. Investors increasingly struggle to distinguish authentic sustainable strategies from relabeled conventional products.

Key Players

Established Leaders

MSCI dominates ESG ratings with coverage of over 8,500 companies and 750,000 equity and fixed-income securities. Their methodologies, while criticized for opacity, remain the de facto benchmark for institutional investors, with an estimated 60% market share in ESG index licensing.

S&P Global integrates ESG analytics across its credit ratings, indices, and data products following its 2020 IHS Markit acquisition. Their Corporate Sustainability Assessment surveys over 10,000 companies annually and drives inclusion in influential indices like the Dow Jones Sustainability Index.

Morningstar Sustainalytics provides ESG risk ratings for over 20,000 companies, with particular strength in controversy monitoring and thematic assessments. Their 2024 platform update introduced AI-enhanced data verification, reducing reliance on self-reported corporate information.

Bloomberg offers ESG data integrated into its terminal platform, enabling seamless incorporation into investment workflows. Their 2024 acquisition of ESG data provider Clarity AI expanded their coverage of private markets and emerging economy issuers.

Refinitiv (LSEG) provides ESG data on over 12,000 companies with particular depth in governance metrics and executive compensation analysis. Their integration with London Stock Exchange Group has enhanced coverage of fixed-income and derivatives markets.

Emerging Startups

Persefoni has emerged as the leading carbon accounting software platform, raising $101 million through 2024 and serving over 200 enterprise customers including major financial institutions. Their platform automates Scope 1-3 emissions calculations and supports SEC, CSRD, and ISSB-aligned reporting.

Watershed provides enterprise climate software focused on corporate decarbonization planning, with customers including Stripe, Airbnb, and DoorDash. Their 2024 Series C valued the company at $1.8 billion, reflecting growing demand for actionable (versus compliance-only) climate data.

Clarity AI uses machine learning to generate ESG assessments from unstructured data sources, reducing dependence on corporate self-disclosure. Acquired by Bloomberg in 2024, their technology exemplifies the shift toward verified rather than reported sustainability data.

Manifest Climate applies AI to climate risk analysis, helping financial institutions interpret physical and transition risks for investment portfolios. Their 2024 expansion into US markets followed successful deployments with major Canadian banks and insurers.

Novata provides ESG data management specifically for private equity, addressing a historically underserved segment. Founded by partners including Hamilton Lane, S&P Global, and Omidyar Network, Novata has rapidly scaled to cover over 40,000 private company assessments.

Key Investors & Funders

Generation Investment Management, co-founded by Al Gore, manages over $45 billion with a fully integrated sustainable approach and has been instrumental in developing frameworks for long-term sustainable investing.

TPG Rise Fund represents one of the largest dedicated impact investing vehicles, with $16 billion in AUM across climate, health, and financial inclusion strategies, demonstrating that institutional-scale impact investing is viable.

BlackRock Sustainable Investing manages over $600 billion in sustainable strategies, making it the largest sustainable asset manager globally. Their voting policies and engagement activities significantly influence corporate ESG practices.

The US Department of Energy Loan Programs Office has deployed over $40 billion in financing for clean energy projects, with $72 billion in additional loan authority under the Inflation Reduction Act, representing the largest source of federal sustainable finance capital.

Breakthrough Energy Ventures, founded by Bill Gates, has invested over $3 billion in climate technology companies, with a unique willingness to fund patient capital in hard-to-decarbonize sectors.

Examples

JPMorgan Chase Sustainable Finance Framework (2024-2025): JPMorgan committed $2.5 trillion in sustainable finance over 10 years, with $1 trillion specifically for green initiatives. Their 2024 implementation included a proprietary ESG data platform integrating 40+ external data sources with internal transaction data, enabling loan-level sustainability assessments. The bank reported that 34% of 2024 commercial lending incorporated sustainability-linked pricing mechanisms, with measurable emissions reduction targets attached to $89 billion in credit facilities. Their data infrastructure investment exceeded $200 million, demonstrating the scale of commitment required for credible sustainable finance implementation.

California State Teachers' Retirement System (CalSTRS) Climate Transition Portfolio: CalSTRS, managing $340 billion, launched a $25 billion Climate Transition Portfolio in 2023 that became fully operational in 2024. The portfolio applies rigorous additionality criteria, requiring investments to demonstrate emissions reductions beyond business-as-usual trajectories. Their methodology combines company-reported data with third-party verification from Trucost and ISS ESG, achieving 89% data coverage for portfolio companies. By end of 2024, the portfolio had allocated capital to 127 companies with verified science-based targets, generating risk-adjusted returns within 30 basis points of the benchmark while achieving an estimated 2.1 million metric tons of CO2e avoidance.

Microsoft Carbon Negative Program Supply Chain Integration: Microsoft's commitment to become carbon negative by 2030 has required unprecedented data integration across its supply chain. By 2024, the company had onboarded 95% of its tier-1 suppliers (by spend) onto standardized emissions reporting platforms, using a combination of Persefoni for software infrastructure and EcoVadis for supplier assessments. Their internal carbon fee of $15 per metric ton (raised to $100 per ton for Scope 3 by 2025) has driven measurable behavior change, with supplier emissions intensity declining 22% since 2020. The program demonstrates how buyer pressure combined with data infrastructure investment can accelerate decarbonization beyond regulatory requirements.

Action Checklist

FAQ

Q: How should US companies approach the overlap between SEC climate rules and international frameworks like CSRD and ISSB? A: The key is to design a unified data architecture that can serve multiple disclosure regimes. ISSB standards provide the foundational framework that both SEC rules and CSRD partially align with. Companies should map their data collection to ISSB requirements first, then layer jurisdiction-specific elements. For companies with EU operations triggering CSRD, the European Sustainability Reporting Standards (ESRS) represent the most comprehensive requirements—meeting ESRS typically satisfies or exceeds other frameworks. Pragmatically, this means investing in granular data collection once and configuring outputs for different reporting formats rather than maintaining parallel systems.

Q: What distinguishes genuine impact measurement from measurement theater? A: Genuine impact measurement requires five elements often absent in performative approaches: (1) theory of change linking activities to outcomes through causal mechanisms; (2) counterfactual analysis establishing what would have happened otherwise; (3) independent verification rather than self-certification; (4) materiality focus on metrics that actually matter for environmental or social outcomes; and (5) feedback loops where measurement informs strategy changes. Measurement theater, by contrast, prioritizes easily quantifiable metrics over meaningful ones, relies entirely on self-reported data, fails to establish additionality, and treats measurement as a compliance exercise disconnected from operations.

Q: How can investors evaluate whether an ESG fund's claims are credible? A: Start with portfolio holdings transparency—credible funds disclose complete holdings at least quarterly. Compare stated investment criteria against actual holdings, checking for obvious contradictions (e.g., a "climate solutions" fund holding major fossil fuel companies without transition rationale). Examine the fund's engagement record and proxy voting policies to assess whether active ownership claims are substantiated. Review the fund's ESG data sources and methodology documentation; opacity is a warning sign. Finally, evaluate fee structures relative to conventional alternatives—significant premiums should correspond to demonstrable additional value in research, engagement, or impact measurement.

Q: What role will AI and alternative data play in resolving ESG data quality challenges? A: AI and alternative data are already transforming ESG analysis from verification of corporate claims to independent assessment. Satellite imagery can detect deforestation, emissions plumes, and supply chain activities without company cooperation. Natural language processing applied to news, regulatory filings, and social media can identify controversies faster than traditional monitoring. Machine learning can identify patterns in disclosed data suggesting manipulation or inconsistency. However, these technologies complement rather than replace fundamental analysis—they're most valuable when integrated with domain expertise and clear materiality frameworks. The risk is that AI-generated ESG scores become another black box, substituting algorithmic opacity for methodological opacity.

Q: How should organizations prioritize ESG data investments given limited resources? A: Prioritize based on three criteria: regulatory requirements, investor materiality, and operational decision-making value. Regulatory requirements are non-negotiable—SEC climate rule compliance must be achieved regardless of resource constraints. For discretionary investments, focus on metrics that matter to your actual investor base; engagement with major shareholders and lenders reveals which data points inform their decisions. Finally, prioritize data that drives internal decisions—if a sustainability metric wouldn't change any operational or capital allocation choice, its value is purely performative. This framework typically points toward prioritizing emissions data quality (mandatory and material), sector-specific operational metrics (decision-useful), and governance indicators (investor-demanded) before comprehensive social metrics or biodiversity assessments.

Sources

Global Sustainable Investment Alliance. (2024). Global Sustainable Investment Review 2024. https://www.gsi-alliance.org/
U.S. Securities and Exchange Commission. (2024). Final Rule: The Enhancement and Standardization of Climate-Related Disclosures for Investors. Release No. 33-11275.
Berg, F., Kölbel, J.F., & Rigobon, R. (2024). "Aggregate Confusion: The Divergence of ESG Ratings." Review of Finance, 28(3), 1315-1344.
International Sustainability Standards Board. (2023). IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. IFRS Foundation.
Carbon Direct. (2024). Assessing the Quality of Corporate Carbon Credit Purchases. Annual Market Analysis Report.
Morgan Stanley Institute for Sustainable Investing. (2024). Sustainable Signals: Individual Investor Interest Driven by Impact and Regulation.