ESG Ratings and the CSRD: What impact will the CSRD have on ESG Ratings?
The first wave of mandatory reports following the implementation of the long-anticipated EU Corporate Sustainability Reporting Directive (CSRD, “Directive”) is being published in 2025. This marks a new era of corporate sustainability transparency. The CSRD is poised to transform corporate sustainability reporting and, consequently, influence change upon the data collected by ESG rating agencies. With the introduction of more standardised sustainability reporting, comes the potential need for ESG rating providers to adapt to a more CSRD-aligned approach. This move could ultimately change how a company’s sustainability performance is evaluated.
This article offers key insights from Leaders Arena’s ESG rating experts on the impact that the CSRD is having on the ESG ratings space, the changes we can expect in the coming years, and how these changes could affect company scores.
Q. How does CSRD reporting impact rating providers & their ratings?
A. Although the CSRD is not directly applicable to rating providers, the introduction of more standardised sustainability reporting poses significant challenges and risks for ESG raters. Collecting more uniform data strengthens the case for less diverse rating methodologies and for having more transparency in how companies are assessed.
The main clients of ESG raters, investors, could also begin to monitor CSRD compliance of their portfolio companies. As a result, ESG raters may need to align their ESG rating criteria, to some extent, with the Directive to cater to the needs of their clients.
One challenge for raters is determining how to assess ESG materiality across industries after the introduction of the double materiality concept under the CSRD. This change is expected to result in a shift in materiality priorities for companies within each industry. As a consequence, some of the leading rating agencies are exploring company-tailored materiality assessments, which involve clear methodology challenges.
On the other hand, there are some notable opportunities for ESG rating agencies, namely the opportunity to expand their advisory services to assist companies with various aspects of CSRD reporting and compliance, such as double materiality analysis.
Q. How are ESG rating agencies currently responding to the introduction of the CSRD?
A. We have already observed that several agencies, such as Bloomberg and LSEG, have set out plans to map their current ESG datasets to the CSRD, with more raters set to follow. This mapping process does not alter the data being collected; instead, it helps companies and investors identify the information that is already being collected as meeting the expectations of the CSRD.
While most raters have not committed publicly to align with the CSRD, some, such as the CDP, have announced plans to seek increased alignment with the Directive in 2025.
In addition to CSRD mapping, we are also seeing that most agencies, such as market leaders MSCI and Sustainalytics, are starting to offer separate CSRD-related products which support compliance with the Directive in various capacities, from risk quantification to double materiality and other ESG data solutions.
Q. How might ESG ratings look in the long term?
A. The CSRD could possibly influence, to some extent, the evolution of ESG rating methodologies over time as raters will want to better reflect the company reporting and keep up with investor needs. However, we expect the changes to ratings to be somewhat limited since agencies will still need to maintain their proprietary rating approaches. Instead, it is more likely that agencies will choose to cater to CSRD-related needs in separate product offerings, as we’ve seen in the past years with the likes of the Sustainable Finance Disclosure Regulation (SFDR) for investors.
Q. Could these evolutions bring further consolidations of the ESG rating agencies?
A. We have already seen that the introduction of the regulation on ESG rating agencies and data providers has caused some stir, with some exiting the market or seeking strategic partnerships and consolidations, such as Moody’s adopting MSCI’s ratings in a strategic partnership. It is possible that the implementation of the CSRD could result in further market consolidations, particularly for those agencies that may struggle to adapt to this changing environment and may find it hard in the longer term to differentiate their methodology enough when investors may be looking to more standard ways of evaluating companies.
Q. Overall, what impact will this have on companies?
A. In the short term, we do not expect a significant impact on companies in either the data collection or the actual rating methodologies and scores. However, the CSRD provides rating agencies the opportunity to enhance their offerings to investors and companies, and potentially develop new ratings and datasets.
In the long term, aligning ESG ratings with the CSRD could disproportionately affect companies that are not required to report under this Directive. Companies without operations in the EU, as well as smaller firms with fewer regulatory obligations, may find themselves at a disadvantage compared to larger European corporations should raters choose to increase the number of assessed CSRD-related data points. With this in mind, companies that are outside of the scope of the CSRD might want to consider more-CSRD-aligned disclosures.
However, it is important to note that many data points currently collected by the rating agencies are already, at least partially aligned with the CSRD. Therefore, we are unlikely to see a significant shift in the types of data collected, especially since there will be a desire among raters to maintain their proprietary methodologies in order to differentiate themselves. Instead, it is more probable that new rating and data products will continue to emerge. Companies should actively track these developments and stay informed about these new assessments.
For those companies required to report in accordance with the CSRD, the increase in data being reported should narrow data gaps in ESG ratings assessments. This could not only lead to improved ESG scores but, in some instances, help to limit the amount of estimated data used by rating agencies.
Likewise, another aspect to consider is that the CSRD requires third-party assurance of sustainability information. Many rating agencies also look for such assurance of ESG information, and therefore, companies impacted by the Directive could gain additional credit from agencies for having this in place.
Leaders Arena has an experienced ESG Ratings team dedicated to supporting companies in identifying key reporting gaps, maximising ESG scores, and responding to ESG-related controversies. In addition, we help companies improve their sustainability reporting and CSRD implementation.
Get in touch to find out more about how we can support you with ESG ratings & sustainability reporting: support@leadersarena.global
