CSRD and the Evolution of ESG Data

Over the past ten years, ESG data has evolved from being manually collected, CSR-focused, and backward looking, to a current state of sophisticated data processing tools, a focus on financial materiality, including elements of forward-looking data and risk assessments. The implementation of the Corporate Sustainability Reporting Directive (CSRD) looks set to be the next frontier of ESG data.

Although CSRD is preceded by a number of ambitious reporting initiatives such as CDP, GRI, SASB, TCFD, ISSB and SFDR, none are as comprehensive in scope (ie. number of applicable KPI´s) and coverage (ie. number of corporates affected). Up to 50,000 companies* are expected to be in scope of CSRD, based on their ties to the EU. Building on its predecessor, the Non-financial Reporting Directive (NFRD), CSRD uniquely combines double materiality with an assurance requirement. What also stands out for the CSRD initiative is that reporting is mandatory for companies of different sizes and across all sectors.

_{^{*Source: IFRS Foundation. Progress on Corporate Climate-related Disclosures – 2024 Report}}

The Significance of CSRD

The ambitious scope of CSRD has the potential to propel ESG data to the next level, which subsequently could bring more insight and higher levels of adoption of ESG information by investors. It is however worth noting that there are some political headwinds that may pose some implementation barriers. Though even if the scope becomes narrowed, CSRD still holds the potential to boost ESG data in many of the ways listed below.

• Coverage: Unlike previous reporting frameworks, CSRD is neither voluntary nor limited to the largest businesses, which means that ESG data availability will achieve a new breadth and include additional asset classes. Though still a couple of years into the future, CSRD reporting in some shape or form is expected to extend to small and mid-size businesses, which makes reported ESG data available for small caps, private equity, private debt, high yield debt, etc. More ESG data availability for asset classes where current coverage is poor, has the added bonus of enhanced estimation models for these asset classes. With better coverage of additional asset classes, investors will have a deeper understanding of the ESG attributes of the full portfolio.

• Materiality: With CSRD, companies are expected to report on sustainability topics that are deemed material, which completes the materiality journey of sustainability and ESG, from ‘CSR-focused’ 10 years ago to ‘materiality-driven’ today. Other voluntary reporting frameworks that predate the CSRD (such as SASB) have advocated for ESG materiality to dictate what is reported, however only from a financial perspective. CSRD completes the materiality circle by mandating that ESG materiality be assessed with both the business (financial) and stakeholders (impact) in mind. The good news for ESG data is that everything that companies disclose under CSRD can be deemed material, which makes it easier for investors to find relevant information (previously lumped together with non-material sustainability disclosures).

• Quality: As with regulatory data more generally, ESG data under CSRD will be subject to greater scrutiny and thus presumably higher quality. Disclosures will be assured to meet similar standards as traditional financial data. Uncertainty around the accuracy and quality of ESG reporting has been a barrier to the adoption of ESG in investment processes to date, and hopefully CSRD will at least partially remove this hurdle.

• Standardisation: Reporting frameworks bring with them a degree of harmonization of reported data, and CSRD is a good example of this. Over time, both what and how companies report under CSRD can be expected to become more standardised and comparable, especially with the introduction of sector standards in 2026. A common criticism of ESG has been that the lack of standardizations make it difficult for ESG information to be structurally integrated in investment workflows. The data is sometimes patchy, but also inconsistent, which has hindered comparison and reduced the decision-usefulness of ESG. A framework as comprehensive as CSRD will allow corporates to advance on the journey of disclosing standardised ESG information.

• Accessibility: Another promising feature that CSRD is set to benefit from is the development of a centralised access point for EU regulatory information. The European Single Access Point (ESAP) will enable stakeholders to tap into the information from one single point, rather than downloading individual reports from various corporate websites. However, the timelines and also format in which the information will be available is still unclear, which casts some uncertainty around the useability of the database.

Commoditization of ESG data

What role can data providers play in a world of readily available, standardised and assured ESG data? With the dawn of CSRD this question has come up a number of times, however it turns out that there is still a good amount of work that can be done with this data. Not only will there continue to be coverage gaps and data quality issues to sort out, but more interestingly the CSRD data set opens up new opportunities to deliver deeper insight and more accessibility options for users.

The so-called “commoditization of ESG data” is the outcome of standardized and centralized ESG reporting, and has been gradually happening over the past decade. CSRD is likely to speed this process up, and push ESG data providers even farther along the path of transforming towards large-scale, automated and quantitative ways to collect, process, analyse and deliver data.

Conclusion

Although much of the CSRD focus in the financial sector today is on the challenges of group level corporate reporting, we can anticipate that the reward will eventually come in the shape of more and better ESG data for investors and other financial sector participants. And even in the event that some of the CSRD ambition is watered down by political headwinds, it can still bring meaningful improvements for the industry. Corporates will have a better understanding of their own material ESG issues, as well as that of their peers and competitors. Investors will have access to more ESG insights for their investments and portfolios. And ESG data providers will be able to deploy more client-centric solutions and deeper insight thanks to the improved data inputs.

It is also worth mentioning that while CSRD may be the star of the show, there are other meaningful industry developments that will also contribute to the next frontier of ESG data. For instance, ISSB holds the key to broader global convergence of ESG disclosures, and CSDDD promises more insight into complex and up until now opaque supply chain issues. The rapid development and deployment of technology tools and AI, could also speed up the development of the ESG data industry. On the flip side, ESG data providers are set to become regulated, which could result in more industry consolidation and some strain on innovation. What remains to be seen over the next couple of years, is how these various development work together to shape the industry.

Cecilia Cisana
Senior Vice President, Client Solutions, Morningstar Sustainalytics