Trend analysis: Sustainable finance data & ESG ratings reform — where the value pools are (and who captures them)

The global ESG data and ratings market generated $3.2 billion in revenue in 2025, yet a study by MIT Sloan and the University of Zurich found that correlations between major ESG rating providers averaged just 0.54, compared to 0.99 for credit ratings. This fundamental inconsistency has triggered the largest regulatory and structural overhaul the sustainable finance data industry has ever experienced, creating a wave of value migration that will redistribute billions in recurring revenue across the data supply chain over the next five years.

Why It Matters

Regulatory pressure is the primary catalyst reshaping ESG data economics. The EU's ESG Ratings Regulation, adopted in 2024 with full application beginning in 2026, introduces mandatory registration, transparency requirements, and conflict-of-interest rules for ESG rating providers operating in Europe. The UK Financial Conduct Authority published its ESG Ratings Code of Conduct in 2024, establishing a voluntary-but-expected governance framework. Japan's Financial Services Agency finalized its Code of Conduct for ESG Data Providers in 2023, and India's Securities and Exchange Board (SEBI) mandated accreditation for ESG rating agencies effective 2024. Collectively, these regulations transform ESG ratings from an unregulated cottage industry into a supervised financial infrastructure with compliance obligations comparable to credit rating agencies.

The scale of assets influenced by ESG data makes the reform stakes enormous. Global sustainable investment assets reached $35.3 trillion in 2024 according to the Global Sustainable Investment Alliance, representing approximately 28% of total professionally managed assets. Asset managers, pension funds, banks, and insurers collectively spend an estimated $1.8 billion annually on ESG data subscriptions, ratings, and analytics, a figure projected to grow to $3.5 billion by 2028 as regulatory reporting obligations expand under the EU Corporate Sustainability Reporting Directive (CSRD), SEC climate disclosure rules, and ISSB standards adopted across multiple jurisdictions.

For founders, the reform cycle creates a rare opening. Incumbents must invest heavily in compliance infrastructure, methodology transparency, and data quality improvements. New entrants with technology-native architectures can capture emerging segments, particularly in automated data collection, AI-driven materiality assessment, and regulatory reporting automation, without the legacy methodology baggage that constrains established providers. The value pool map that follows identifies where margins concentrate today, where they are migrating, and which business models are best positioned to capture them.

Key Concepts

ESG Ratings Divergence refers to the well-documented disagreement between rating agencies when assessing the same company. Research from Berg, Kolbel, and Rigobon (2022) identified three sources of divergence: scope (which categories are included), measurement (how the same category is quantified), and weight (how categories are aggregated). Divergence undermines the utility of ESG ratings for investment decisions, portfolio construction, and regulatory compliance, creating demand for tools that help investors interpret and reconcile conflicting signals.

Double Materiality is the conceptual framework, mandated under the EU's CSRD, requiring companies to report both how sustainability issues affect their financial performance (financial materiality) and how their operations impact society and the environment (impact materiality). This represents a fundamental expansion of disclosure scope beyond the single-materiality approach favored by the ISSB and SEC frameworks. Data providers must support both materiality lenses, significantly increasing the complexity and volume of data collection, validation, and analysis.

Regulatory-Grade Data describes ESG information that meets the auditability, completeness, and accuracy standards required for regulatory filings. Unlike voluntary disclosures, regulatory-grade data must withstand external assurance, satisfy specific taxonomic definitions (such as EU Taxonomy alignment metrics), and maintain audit trails from source to reported figure. The transition from voluntary to regulatory-grade data is the single largest driver of spending increases in the ESG data market.

Alternative Data for ESG encompasses non-traditional data sources including satellite imagery, natural language processing of news and regulatory filings, supply chain transaction data, emissions sensor networks, and employee review platforms. Alternative data addresses the timeliness gap in traditional ESG reporting (which typically lags 6 to 18 months behind actual performance) and provides verification capabilities for self-reported corporate disclosures.

ESG Data Market Value Pool Map

Value Pool Segment	2025 Revenue	Projected 2028 Revenue	Gross Margin	Growth Driver
ESG Ratings & Scores	$1.4B	$2.0B	65-75%	Regulatory mandates, index inclusion
Raw ESG Data Collection	$0.6B	$1.2B	40-50%	CSRD/ISSB reporting expansion
ESG Analytics & Tools	$0.5B	$1.1B	55-65%	Portfolio integration, stress testing
Regulatory Reporting Software	$0.3B	$0.8B	60-70%	CSRD, SEC, ISSB compliance deadlines
Alternative ESG Data	$0.2B	$0.5B	50-60%	Verification, timeliness demands
ESG Index & Benchmark Licensing	$0.2B	$0.4B	80-90%	Passive ESG fund growth

What's Working

Consolidation by Financial Data Incumbents

The highest-margin value pool, ESG ratings and index licensing, has been captured by financial data conglomerates through aggressive acquisition. S&P Global acquired the IHS Markit ESG business and integrated it with its Trucost environmental data platform. MSCI generates approximately $320 million annually from ESG and climate products, with operating margins exceeding 60%. Morningstar acquired Sustainalytics for $170 million in 2020, a deal that appears extraordinarily favorable given Sustainalytics' current revenue run rate exceeding $250 million. London Stock Exchange Group completed its acquisition of Refinitiv (including its ESG scoring business) as part of the $27 billion deal that also brought FTSE Russell's ESG index capabilities in-house. These incumbents benefit from embedded distribution through terminal platforms, bundled data contracts, and institutional switching costs that make displacement extremely difficult.

Automated Data Collection Platforms

Companies automating the collection and structuring of corporate sustainability data are capturing a fast-growing segment. Clarity AI processes sustainability data on over 70,000 companies using AI and machine learning to extract, normalize, and score ESG information from regulatory filings, sustainability reports, and alternative sources. The company raised $80 million in 2024 at a reported valuation exceeding $500 million. Arabesque S-Ray uses natural language processing to analyze millions of news sources and corporate disclosures daily, providing near-real-time ESG signal detection. These platforms address the fundamental bottleneck in ESG data: the labor-intensive, error-prone process of manually extracting data from unstructured corporate reports and converting it into machine-readable, comparable datasets.

CSRD Compliance Software

The EU's CSRD, which requires approximately 50,000 companies to report against European Sustainability Reporting Standards (ESRS) starting in 2025 (for the largest companies, with phased implementation through 2028), has created a significant compliance software market. Workiva, which reported $678 million in total revenue for 2024, has expanded its platform to support integrated financial and sustainability reporting with audit-ready controls. Persefoni raised $101 million to build a carbon accounting and climate disclosure management platform targeting CSRD and SEC compliance. Watershed reached a $1.8 billion valuation in 2024, positioning its enterprise carbon management platform for regulatory reporting workflows.

What's Not Working

Stand-alone ESG Rating Startups

New entrants attempting to compete directly on ESG ratings face structural barriers. Institutional investors have limited appetite to add another rating to already fragmented ESG data stacks. The incumbents' bundled distribution model means that switching involves renegotiating comprehensive data contracts, not simply substituting one rating for another. Several ESG rating startups that raised venture capital between 2020 and 2023 have pivoted away from ratings toward analytics, reporting tools, or sector-specific data products after finding that institutional sales cycles for ratings exceed 12 to 18 months and price competition with bundled incumbents erodes unit economics.

Voluntary ESG Frameworks Without Regulatory Backing

Proprietary ESG frameworks that lack regulatory endorsement are losing market relevance. The convergence toward ISSB standards (adopted or referenced by jurisdictions covering over 40% of global GDP by 2025) and ESRS in Europe has marginalized competing frameworks. Data providers built exclusively around proprietary scoring methodologies face the choice of aligning with regulatory standards, which reduces differentiation, or maintaining independent approaches that become less useful as regulated reporting displaces voluntary disclosure.

Carbon Offset Verification Without Regulatory Integration

Companies focused solely on voluntary carbon market data and verification have seen demand plateau as the voluntary carbon market contracted from $2.1 billion in 2023 to an estimated $1.6 billion in 2025. The shift toward compliance markets (EU ETS, CBAM, California cap-and-trade) favors data providers integrated with regulatory reporting systems rather than stand-alone voluntary market platforms.

Key Players

Established Leaders

MSCI dominates ESG index licensing and ratings with over 3,000 institutional clients, generating $320+ million annually from ESG products with operating margins exceeding 60%. Their embedded position in portfolio construction workflows creates formidable switching costs.

S&P Global combines Trucost environmental data, corporate ESG scores, and commodity market intelligence into an integrated sustainability analytics suite distributed through Capital IQ and Market Intelligence platforms.

Morningstar/Sustainalytics provides ESG risk ratings covering 20,000+ companies, deeply integrated with Morningstar's investment research platform used by wealth managers, advisors, and asset owners.

London Stock Exchange Group (LSEG) operates Refinitiv ESG data and FTSE Russell ESG indexes, with distribution through the Refinitiv Workspace terminal platform reaching approximately 400,000 financial professionals.

Emerging Startups

Clarity AI uses machine learning to process sustainability data on 70,000+ companies, differentiating through coverage breadth and automated data extraction that reduces reliance on company self-reporting.

Watershed provides enterprise carbon management software targeting Fortune 500 companies, with a platform designed for regulatory-grade emissions accounting and climate disclosure.

Persefoni builds carbon accounting and climate disclosure management tools compliant with CSRD, SEC, and ISSB requirements, targeting the compliance software value pool.

ESG Book (formerly Arabesque S-Ray) offers a real-time ESG data platform using natural language processing to provide dynamic sustainability scores updated continuously rather than on annual review cycles.

Novata targets private equity and private credit ESG data collection and reporting, addressing a segment underserved by public-market-focused incumbents.

Key Investors and Funders

General Atlantic led Clarity AI's $80 million round and has made multiple investments in ESG data infrastructure, signaling conviction in the automated data collection layer.

Sequoia Capital and Kleiner Perkins co-led Watershed's Series C, valuing the company at $1.8 billion and reflecting venture capital's bet on the compliance software value pool.

Deutsche Borse Venture Network and SIX Group have invested in ESG data startups, combining exchange operator distribution with emerging data capabilities.

Action Checklist

• Identify which value pool segment (ratings, raw data, analytics, compliance software, alternative data, or indexes) your product targets and validate that segment's growth trajectory independently
• Assess regulatory dependency by mapping which specific regulations (CSRD, SEC, ISSB, national codes) drive your target customers' purchasing decisions
• Evaluate incumbent bundling risk by determining whether your product can be replicated and included in existing terminal or data platform contracts
• Build for regulatory-grade data quality from day one, including audit trails, data lineage, and assurance-ready documentation
• Design pricing models that scale with regulatory reporting scope (number of entities, standards, jurisdictions) rather than per-user terminal access
• Prioritize partnerships with audit firms (Big Four) and compliance consultancies that influence enterprise ESG data purchasing decisions
• Develop interoperability with dominant financial data platforms (Bloomberg, Refinitiv, FactSet) to reduce buyer friction
• Monitor regulatory timelines closely as implementation delays (common in ESG regulation) directly affect customer urgency and budget cycles

FAQ

Q: Which ESG data value pool offers the best opportunity for new entrants? A: Regulatory reporting software and automated data collection offer the strongest entry points. These segments are growing fastest (projected 35-45% CAGR through 2028), have lower incumbent lock-in than ratings or indexes, and benefit from clear regulatory demand signals. The compliance software market in particular rewards technology-native architectures that legacy providers struggle to replicate. Attempting to displace MSCI or Sustainalytics in core ESG ratings is inadvisable for startups given embedded distribution advantages and institutional inertia.

Q: How will the EU ESG Ratings Regulation change the competitive landscape? A: The regulation requires all ESG rating providers operating in the EU to register with ESMA, disclose methodologies, manage conflicts of interest, and maintain separation between rating and consulting activities. For incumbents, compliance costs are manageable relative to revenue. For smaller providers, the regulatory overhead may prove prohibitive, potentially consolidating the market further. However, the transparency requirements could reduce the "black box" advantage that incumbents currently enjoy, creating opportunities for providers whose methodologies perform better under scrutiny.

Q: Is there a viable business model in reconciling divergent ESG ratings? A: Several companies have attempted to build "ratings of ratings" or meta-analysis platforms. While intellectually appealing, these businesses face the challenge that institutional investors increasingly want raw data and proprietary analytics rather than another aggregated score. The more viable approach is providing tools that help investment teams understand why ratings diverge for specific companies and which signals are most material to their portfolio strategy, essentially analytics layered on top of multiple rating inputs rather than a unified score.

Q: What margins should founders expect in ESG data businesses? A: Gross margins vary significantly by segment. Index and benchmark licensing achieves 80-90% gross margins due to minimal marginal cost per client. ESG ratings and analytics operate at 55-75% gross margins. Raw data collection businesses run at 40-50% gross margins because of the labor and technology required for continuous data extraction. Compliance software achieves 60-70% gross margins typical of enterprise SaaS. Net margins depend heavily on sales efficiency: enterprise ESG data sales cycles average 6 to 12 months, and customer acquisition costs for institutional clients frequently exceed $50,000 to $100,000.

Q: How does the ISSB standards convergence affect ESG data providers? A: The International Sustainability Standards Board's IFRS S1 and S2 standards, adopted or endorsed by jurisdictions including the UK, Canada, Australia, Japan, Singapore, Nigeria, and others, create a common disclosure baseline that reduces the data collection burden but also commoditizes basic ESG information. Providers relying on proprietary data collection from voluntary disclosures lose differentiation as standardized, audited data becomes freely available in regulatory filings. The value migrates from data collection to data analytics, interpretation, and integration with investment workflows.

Sources

• Berg, F., Kolbel, J., & Rigobon, R. (2022). Aggregate Confusion: The Divergence of ESG Ratings. Review of Finance, 26(6), 1315-1344.
• Global Sustainable Investment Alliance. (2025). Global Sustainable Investment Review 2024-2025. Brussels: GSIA.
• European Securities and Markets Authority. (2025). ESG Ratings Regulation: Technical Standards and Implementation Guidance. Paris: ESMA.
• Opimas. (2025). ESG Data Market: Revenue, Growth, and Competitive Dynamics. Boston: Opimas LLC.
• International Sustainability Standards Board. (2025). Adoption Tracker: Jurisdictional Progress on IFRS S1 and S2. London: IFRS Foundation.
• BloombergNEF. (2025). Sustainable Finance Market Outlook: Data, Ratings, and Analytics. New York: Bloomberg LP.
• PwC. (2025). Global ESG Reporting Survey: Corporate Readiness for CSRD, SEC, and ISSB Compliance. London: PricewaterhouseCoopers.