Interview: practitioners on Sustainable finance data & ESG ratings reform — what they wish they knew earlier

When MSCI rates a company "AA" for ESG performance while Sustainalytics assigns it a "high risk" designation for the same reporting period, portfolio managers face a fundamental problem that extends far beyond semantic disagreement. Research from MIT Sloan published in 2024 found that ESG ratings from major providers correlate at just 0.54 on average—a figure that would be considered unacceptable for credit ratings, where correlations typically exceed 0.99. This divergence isn't merely academic: it represents billions of euros in misallocated capital, compliance uncertainty under the EU's evolving Sustainable Finance Disclosure Regulation (SFDR), and mounting frustration among practitioners who must explain contradictory signals to stakeholders. We spoke with sustainability officers, asset managers, and data engineers across European institutions to understand what they wish they had known earlier about navigating this landscape.

Why It Matters

The sustainable finance data ecosystem has reached an inflection point. According to the Global Sustainable Investment Alliance, assets under management incorporating ESG criteria exceeded €35 trillion globally in 2024, with European markets representing approximately 45% of that total. The European Securities and Markets Authority (ESMA) reported in its 2024 sustainability assessment that over 80% of European asset managers now integrate ESG factors into investment decisions, yet fewer than 30% express confidence in the quality and comparability of the underlying data.

The regulatory context amplifies these stakes. The Corporate Sustainability Reporting Directive (CSRD), which began phased implementation in 2024, will eventually require approximately 50,000 European companies to disclose standardized sustainability information according to the European Sustainability Reporting Standards (ESRS). Meanwhile, the EU Taxonomy Regulation demands that financial market participants classify investments against technical screening criteria—a process that depends entirely on reliable underlying data.

"We spent €2.3 million in 2024 on ESG data subscriptions across four major providers," explains a chief sustainability officer at a German pension fund who requested anonymity. "The tragedy is that we still couldn't confidently answer basic questions about portfolio alignment with Article 9 fund requirements. The data simply doesn't reconcile."

The cost burden is not evenly distributed. A 2025 survey by the European Fund and Asset Management Association (EFAMA) found that smaller asset managers spend between 0.8% and 1.2% of their operating budgets on ESG data and compliance infrastructure—a figure three to four times higher as a percentage than their larger competitors, who benefit from economies of scale.

Key Concepts

Risk Transfer in ESG Context: Risk transfer refers to the mechanisms by which sustainability-related financial risks—physical climate risks, transition risks, and liability risks—are allocated between parties in investment contracts, insurance products, and structured finance instruments. Practitioners increasingly recognize that ESG ratings serve as proxies for these underlying risk factors, making ratings divergence a material concern for hedging strategies and portfolio construction.

SEC Climate Rules and Transatlantic Implications: The U.S. Securities and Exchange Commission's climate disclosure requirements, finalized in 2024 after significant legal challenges, create compliance obligations for European companies listed on American exchanges. More broadly, they signal convergence pressure on global disclosure standards. European practitioners must navigate both CSRD requirements and potential SEC obligations, often with data systems designed for neither.

Traceability in Sustainability Data: Traceability describes the ability to track sustainability claims back to their source documentation, methodologies, and underlying evidence. The EU's Digital Product Passport initiative and the proposed Green Claims Directive both emphasize traceability as a mechanism for preventing greenwashing. In practice, most ESG data lacks full traceability, with ratings providers treating methodologies as proprietary intellectual property.

Weighted Average Cost of Capital (WACC) Adjustments: Financial theory suggests that companies with superior ESG performance should access capital at lower costs, reflecting reduced risk. Empirical evidence from 2024-2025 studies shows mixed results, with clear WACC benefits observable primarily for climate leaders in carbon-intensive sectors. Practitioners report that ESG ratings inconsistency undermines their ability to model these effects reliably.

Compliance Architecture: This term describes the integrated systems—data pipelines, governance frameworks, audit trails, and reporting interfaces—required to demonstrate regulatory adherence. Under SFDR, CSRD, and the Taxonomy Regulation, compliance architecture has become a significant capital expenditure, with leading institutions investing €5-15 million in system upgrades between 2023 and 2025.

What's Working and What Isn't

What's Working

Standardized Corporate Disclosures Under CSRD: Despite implementation challenges, the shift toward mandatory, audited sustainability reporting is producing tangible improvements. "For the first time, we're seeing CFOs treat carbon data with the same rigor as financial statements," notes a sustainability data analyst at BNP Paribas Asset Management. Early CSRD-compliant reports from large European corporates show dramatically improved data completeness, with Scope 1 and 2 emissions coverage reaching 95% for in-scope companies compared to roughly 60% for voluntary reporters.

Satellite and Remote Sensing Verification: Technology-enabled verification is beginning to address the trust deficit. Companies like Kayrros and Orbio Earth now provide independent methane emissions monitoring that asset managers use to validate corporate disclosures. A senior portfolio manager at Amundi described using satellite data to identify a 40% discrepancy between a portfolio company's reported emissions and observed facility-level measurements—a finding that triggered engagement and eventual restatement.

Sector-Specific Data Initiatives: Industry-led data sharing arrangements are demonstrating value where they achieve critical mass. The Partnership for Carbon Accounting Financials (PCAF) methodology has been adopted by over 400 financial institutions globally, enabling more consistent Scope 3 financed emissions calculations. In the real estate sector, the Global Real Estate Sustainability Benchmark (GRESB) provides comparable property-level data that practitioners describe as significantly more actionable than company-wide ESG ratings.

AI-Enabled Data Extraction and Normalization: Machine learning tools are accelerating the processing of unstructured sustainability disclosures. Clarity AI and Util report processing over 10,000 corporate sustainability reports annually, extracting structured data points that would require months of analyst time to compile manually. "We reduced our annual data collection cycle from 14 weeks to 3 weeks," reports a data operations manager at a Dutch asset manager.

What Isn't Working

Methodological Opacity and Ratings Proliferation: The fundamental challenge of ratings divergence remains unresolved. ESMA's 2024 review identified over 150 ESG ratings providers operating in Europe, with no standardized methodology requirements. Practitioners consistently report that attempts to reconcile ratings often reveal contradictory materiality frameworks, incompatible scope definitions, and inconsistent treatment of controversies. "We tried to reverse-engineer why one provider upgraded a holding while another downgraded it the same week," recounts a risk manager at Allianz Global Investors. "After two weeks of analysis, we concluded the ratings were measuring fundamentally different things under the same label."

Small and Medium Enterprise Coverage Gaps: While large-cap coverage is extensive, SME data remains a critical blind spot. An estimated 96% of European companies—employing 65% of the workforce—fall below the market capitalization thresholds that attract comprehensive ESG analysis. A sustainability officer at KfW described the challenge: "Our mandate includes financing the Mittelstand, but we simply cannot obtain comparable ESG data for most of these companies. We're forced into costly manual assessments or accepting data gaps."

Double Materiality Implementation Confusion: The CSRD's double materiality standard—requiring companies to assess both how sustainability issues affect the business and how the business affects society and environment—has proven conceptually challenging to operationalize. "Our clients understand financial materiality because they've done it for decades," explains a partner at a Big Four accounting firm's sustainability practice. "Impact materiality requires entirely different capabilities. Many are essentially guessing."

Regulatory Fragmentation Despite Harmonization Efforts: Even within Europe, practitioners navigate overlapping and occasionally contradictory requirements. The Taxonomy Regulation, SFDR, CSRD, and national implementing measures create a compliance matrix that smaller firms struggle to parse. "We counted 47 distinct disclosure obligations across EU regulations that touch our sustainability reporting," notes a compliance director at a Nordic bank. "The cost of tracking regulatory changes alone requires dedicated headcount."

Key Players

Established Leaders

MSCI ESG Research: The largest ESG ratings provider by revenue, covering over 14,000 issuers globally. MSCI's ratings are embedded in indices representing over €3.8 trillion in tracked assets, making their methodology decisions systemically significant.

Sustainalytics (Morningstar): Provides ESG risk ratings emphasizing material financial risks from ESG factors. Their acquisition by Morningstar in 2020 integrated ESG data into the broader Morningstar investment research ecosystem used by wealth managers across Europe.

ISS ESG (Institutional Shareholder Services): Combines ESG ratings with governance research and proxy voting advisory services. Their integration of voting recommendations with ESG assessments makes them particularly influential for institutional investors implementing stewardship strategies.

S&P Global Sustainable1: Leverages S&P's data infrastructure to provide ESG scores, climate scenario analysis, and Taxonomy alignment assessments. Their acquisition of Trucost strengthened environmental data capabilities.

Bloomberg ESG Data Services: Integrates ESG data directly into Bloomberg Terminal workflows used by the majority of institutional investors. Their recently expanded coverage includes over 15,000 companies with standardized data fields mapped to regulatory frameworks.

Emerging Startups

Clarity AI: Madrid-headquartered technology platform using machine learning to analyze sustainability data at scale. Raised €65 million in Series C funding in 2024, with particular strength in Taxonomy alignment assessment.

Util: London-based startup quantifying real-world impact of products and services. Their methodology connects revenue streams to SDG outcomes, addressing the impact measurement gap that traditional ratings miss.

Datamaran: Irish RegTech company specializing in materiality assessment and regulatory monitoring. Their AI-driven platform tracks regulatory developments across 80+ jurisdictions, helping compliance teams anticipate requirements.

Persefoni: Climate management and carbon accounting platform that has expanded aggressively in European markets. Raised €100 million in 2024 to support CSRD compliance capabilities.

Sweep: Paris-based carbon management platform targeting enterprise Scope 3 emissions. Their supply chain engagement tools address one of the most challenging data gaps in corporate carbon accounting.

Key Investors & Funders

Softbank Vision Fund: Major backer of sustainability data infrastructure, with investments in Clarity AI and other climate tech data companies exceeding €500 million.

Generation Investment Management: The sustainable investment firm co-founded by Al Gore has invested in multiple ESG data and analytics companies, bringing both capital and credibility.

European Investment Fund (EIF): Provides equity and guarantee support to climate tech and sustainability data ventures, with particular focus on companies supporting CSRD implementation.

Balderton Capital: Leading European venture firm with significant sustainability data portfolio, including early-stage investments in carbon accounting and supply chain traceability.

BNP Paribas Développement: The strategic investment arm has prioritized sustainability data capabilities, recognizing the competitive advantage of proprietary data infrastructure.

Examples

Example 1: Nordea Asset Management's Data Integration Initiative Between 2023 and 2025, Nordea consolidated ESG data from seven providers into a unified internal scoring system. The project required €8.5 million in technology investment and 18 months of methodology development. Results included a 34% reduction in analyst time spent reconciling data conflicts, improved audit trails for SFDR reporting, and identification of 23 portfolio holdings where provider ratings diverged by more than three standard deviations—triggering targeted engagement. The initiative demonstrated that proprietary data infrastructure can mitigate, though not eliminate, the ratings divergence problem.

Example 2: Crédit Agricole's CSRD Readiness Program As one of the first financial institutions to publish CSRD-aligned reports for FY2024, Crédit Agricole invested €12 million in data systems, training, and external assurance. The bank implemented granular Taxonomy alignment assessment for its loan book, achieving 78% coverage for eligible activities. Key learnings included the necessity of engaging borrowers 12-18 months before disclosure deadlines and the value of automated data collection reducing manual processing by 65%.

Example 3: APG Asset Management's Satellite Verification Pilot The Dutch pension asset manager partnered with Kayrros to verify emissions claims for its €580 billion portfolio. The 2024 pilot covered 200 high-emitting holdings, identifying material discrepancies in 12% of cases. Follow-up engagement resulted in five companies restating emissions figures and three revising reduction targets. APG has since expanded satellite monitoring to full portfolio coverage, integrating alerts into their stewardship workflow.

Action Checklist

• Conduct a data provider audit comparing coverage, methodology transparency, and cost per holding for your specific portfolio composition
• Map current ESG data workflows against CSRD and SFDR requirements to identify compliance gaps before regulatory deadlines
• Establish internal protocols for handling ratings divergence, including escalation thresholds and documentation requirements
• Build relationships with portfolio companies' sustainability teams to access primary data rather than relying solely on third-party ratings
• Evaluate technology-enabled verification options (satellite monitoring, AI extraction) for highest-materiality holdings
• Implement traceability documentation linking ESG claims to source evidence for audit defense
• Calculate the true cost of ESG data including analyst time, system integration, and compliance overhead—not just subscription fees
• Develop SME assessment frameworks for portfolio segments where commercial ESG coverage is inadequate
• Participate in industry data-sharing initiatives (PCAF, GRESB, sector alliances) to benefit from collective infrastructure
• Create regulatory monitoring processes to anticipate methodology changes from both data providers and regulators

FAQ

Q: How should asset managers handle situations where different ESG rating providers give contradictory signals on the same company? A: Leading practitioners recommend a three-step approach. First, identify the specific factors driving divergence—typically materiality weighting, controversy treatment, or scope definitions. Second, determine which factors are most relevant to your investment thesis and fiduciary obligations. Third, document your reasoning for following one signal over another, creating an audit trail for client reporting and regulatory inquiry. Many institutions now maintain internal "override" protocols where analyst judgment supersedes any single provider rating when divergence exceeds defined thresholds.

Q: What is the realistic cost of achieving CSRD compliance for mid-sized asset managers? A: Based on 2024-2025 implementation experience, mid-sized European asset managers (€10-50 billion AUM) should budget €1.5-4 million for initial CSRD compliance, including data system upgrades, staff training, and external assurance. Ongoing annual costs for data subscriptions, system maintenance, and audit support typically range from €400,000 to €800,000. Smaller managers should explore managed services and consortium approaches to share infrastructure costs.

Q: Are ESG ratings predictive of financial performance? A: The academic evidence is nuanced. Meta-analyses covering studies through 2024 suggest a modest positive relationship between ESG performance and financial returns, particularly over longer time horizons and when measuring risk-adjusted returns. However, the divergence between rating providers means that correlations depend heavily on which ratings are used. Practitioners increasingly focus on specific, material ESG factors rather than aggregate ratings—for example, carbon intensity for fossil fuel transition risk or supply chain labor practices for operational resilience.

Q: How can data engineers improve ESG data pipeline reliability? A: Priority improvements include implementing version control for methodology changes (treating ESG data schemas like code), building automated reconciliation checks across providers, establishing clear data lineage documentation, and creating alert systems for coverage gaps or unusual rating movements. Modern data architecture should assume ESG data will require transformation and validation, not simply ingestion.

Q: What regulatory changes should decision-makers anticipate in 2025-2026? A: Key developments include ESMA's forthcoming ESG ratings provider regulation, which will introduce authorization requirements and methodology disclosure obligations in the EU by late 2025. The European Commission's review of SFDR implementation may result in simplified product categorization. Internationally, the IFRS Foundation's ISSB standards are gaining adoption, potentially enabling greater comparability between European and global disclosures. Decision-makers should monitor the EU Green Claims Directive, which will impose verification requirements on sustainability marketing with direct implications for fund labeling.

Sources

• European Securities and Markets Authority (ESMA). "Progress Report on Greenwashing." 2024.
• MIT Sloan Management Review. "Aggregate Confusion: The Divergence of ESG Ratings." Updated 2024.
• Global Sustainable Investment Alliance. "Global Sustainable Investment Review 2024."
• European Fund and Asset Management Association (EFAMA). "ESG Data and Costs Survey." 2025.
• European Commission. "Corporate Sustainability Reporting Directive Implementation Report." 2024.
• Partnership for Carbon Accounting Financials (PCAF). "The Global GHG Accounting and Reporting Standard for the Financial Industry." Third Edition, 2024.