Starting in mid-2026, new rules will apply in the European Union for ESG rating providers. Anyone assessing companies on environmental, social, and governance criteria will in future need authorisation from the European Securities and Markets Authority (ESMA), as stipulated by the new ESG Rating Regulation adopted at the end of 2024. The aim is to improve the quality and transparency of ratings, prevent conflicts of interest, and establish a certain degree of comparability. However, largely standardised results – as in credit ratings – will remain out of reach.

„The regulation promotes openness but not uniform results – and that is a good thing,“ says Till Jung, Head of Sustainability Business at ISS Stoxx. The company, a subsidiary of Deutsche Börse, is among the leading providers of ESG ratings. Its rating unit, ISS Sustainability Solutions, sells data and assessments to investors who wish to align their portfolios sustainably or simply understand the risks companies face. Alongside ISS, major data providers include MSCI, Morningstar Sustainalytics, and S&P Global.

The new EU regulation requires greater transparency in rating methodologies. „The new ESG Rating Regulation mainly increases transparency because documentation of the methodology will become far more strictly prescribed,“ Jung explains. At the same time, he defends the diversity of approaches: „Fortunately, a regulatory harmonisation of methodology was avoided. Investors do not primarily want identical results – they want to understand why one rating may differ from another.“

According to Jung, the frequent discrepancies between ESG ratings stem from different perspectives on sustainability. If there were strong demand for standardised ratings, the market would respond – but that is not the case. Investors, he notes, choose the provider whose methodology best matches their ESG investment approach. The time horizon plays a key role: „For us, impact is not an ideology but a question of time horizon – what is not priced in today may become relevant tomorrow", he says. Other ESG specialists emphasise different priorities.

For a long time, ESG discussions centred mainly on emissions. Today, the focus has broadened. „In the past, investors asked how to decarbonise their portfolios; now they ask how they can help decarbonise the real economy,“ says Jung. At the same time, physical risks are gaining importance because of their potential short-term impact on portfolios. Extreme weather, droughts, and floods can severely affect individual companies.

„Our data not only show where elevated site-specific risks exist but also how well a company is prepared,“ Jung explains. Not every site in a high-risk area is automatically endangered. Companies that take preventive measures can mitigate risks. „Protective measures can make sites less vulnerable, and that must be reflected in risk assessments.“

In resource-intensive industries such as energy or mining, the exact location of production sites is crucial. „We overlay satellite images with site data – sometimes it turns out a factory is located elsewhere than the address suggests.“

The input for ESG ratings has grown in recent years but remains incomplete. „Despite growing volumes of data, gaps remain – especially among smaller companies,“ Jung notes. He expects that even firms below the legal reporting threshold will increasingly act voluntarily. „We anticipate that smaller companies will also disclose data, even if not required by law – the market demands it. Anyone seeking capital will need to report.“

Where reported data is missing, the industry relies on estimates – particularly for climate-related risks. „We combine climate models with geodata, vegetation, and wind patterns, which makes the models more robust,“ Jung explains. This is especially indispensable for indirect emissions: for Scope 3 emissions – those along the value chain – the share of reported data averages only about 13 percent.

Differences between Europe and the United States also shape ESG ratings. „In Europe, double materiality is the foundation – we consider both financial and societal impacts,“ Jung explains. In the United States, by contrast, the focus remains largely on short-term financial risks. Still, some investors there – such as insurers and pension funds – are thinking beyond that horizon.

For many funds, the key question is whether factors overlooked today could become tomorrow’s risks. ISS ESG therefore seeks to reflect this trajectory. „Our rating incorporates indicators that may not yet be priced in but are likely to become risk-relevant in the future,“ says Jung.