Institutional investors are increasingly pivoting toward internal resources to evaluate the environmental, social, and governance (ESG) performance of companies, marking a significant departure from previous years when third-party ESG ratings were the primary benchmark for sustainable investment. According to the latest "Rate the Raters 2026" report released by the ERM Sustainability Institute, in-house research and direct engagement with corporate leadership have overtaken external ESG ratings as the most trusted and utilized sources of information. This transition comes as perceived quality and trust in traditional ESG ratings providers have faced a steady decline, prompting a more sophisticated and hands-on approach from the world’s largest asset managers.
The report, which surveyed 53 investment industry professionals from firms representing a combined $23.5 trillion in assets under management (AUM), highlights a fundamental shift in the ESG ecosystem. The respondents, spanning North America, EMEA, Asia Pacific, and Latin America, indicate that while ESG data remains a critical component of the investment process, the "black box" nature of proprietary ratings is being replaced by proprietary internal models.
The Erosion of Trust in External ESG Ratings
One of the most striking findings of the ERM survey is the quantifiable drop in trust regarding the accuracy of ESG ratings. Investors were asked to rank their trust in these ratings’ ability to accurately judge a company’s sustainability performance on a scale of one to five. The average score fell to 3.05 in the most recent survey, a notable decrease from the 3.31 recorded in 2023. This decline reflects growing skepticism over the methodologies used by ratings agencies, which often vary significantly between providers, leading to "rating divergence"—a phenomenon where the same company receives wildly different scores from different agencies.
Despite this decline in trust, the survey reveals a nuanced reality: external ratings have not been abandoned, but their role has been redefined. Rather than serving as a final verdict on a company’s ESG standing, these ratings are now primarily used as raw data inputs for internal assessments. Over half of the investors surveyed (51%) still view ESG ratings data as material to investment performance. While this is a slight dip from 57% in 2023, it underscores the fact that the underlying data provided by agencies remains valuable, even if the final scores are viewed with skepticism.
The Rise of In-House Research and Direct Engagement
The hierarchy of information sources for investment decisions has undergone a radical transformation over the last three years. In the 2023 iteration of the survey, corporate ESG ratings were ranked as the number one most useful source of information for making investment decisions. In the 2026 report, however, ratings have plummeted to the seventh position.
Taking the top spots are in-house research and direct engagement with companies. This shift suggests that investors are no longer content with passive data consumption. Instead, they are seeking deeper, more contextualized insights that can only be gained through one-on-one dialogues with corporate boards and sustainability teams. Corporate sustainability reports have also risen in importance, now occupying the third spot, as investors look for primary-source disclosures to fuel their internal analytical engines.
This internalization of ESG analysis allows investment firms to tailor their evaluations to their specific investment philosophies. By developing proprietary scoring systems, asset managers can weigh certain factors—such as carbon transition risk or board diversity—more heavily based on their own risk assessments and the specific needs of their portfolios.
Comparative Performance of Ratings Providers
The "Rate the Raters" report also provides a detailed look at the competitive landscape of ESG ratings providers. In a significant shake-up of the rankings, MSCI has ascended to the top spot in terms of perceived quality, rising from seventh place in 2023. Notably, MSCI was the only provider to see an increase in its quality score during this period. Following MSCI in the quality rankings are CDP (formerly the Carbon Disclosure Project), EcoVadis, and S&P Global.
In terms of usefulness, MSCI and EcoVadis also saw substantial gains, moving to the first and second positions, respectively. This is a significant jump from their 2023 rankings, where they sat at fifth and seventh. The rise of EcoVadis is particularly noteworthy as it reflects an increasing focus on supply chain transparency and private company data, areas where EcoVadis has established a strong foothold.
The survey indicates that the providers who are gaining traction are those perceived to offer the most granular data and those whose methodologies are seen as more transparent or better aligned with financial materiality.
Frequency of Use and the Impact of Mandatory Disclosures
While the reliance on external ratings for final decision-making has decreased, the frequency of their use remains high. The survey found that 58% of investors use ESG ratings and products at least once per week, with 36% reporting use multiple times per week. This is a decrease from 69% in 2023, yet it still represents a significant integration of these tools into the daily workflow of investment professionals.
A major catalyst for the future of ESG data is the emergence of mandatory sustainability disclosure regimes. A significant majority (62%) of investors anticipate that the implementation of regulations such as the EU’s Corporate Sustainability Reporting Directive (CSRD), the SEC’s climate disclosure rules, and the International Sustainability Standards Board (ISSB) standards will increase their use of ESG data in the coming years.
These mandates are expected to improve the quality, consistency, and comparability of the data that companies report. As standardized data becomes more widely available, investors expect ratings providers to evolve. The survey asked investors to prioritize future changes, and the consensus was clear: they want a greater focus on financially material issues, better linkages between ESG metrics and actual company performance, and significantly improved disclosure regarding the methodologies used to calculate scores.
Chronology of the ESG Rating Evolution
The evolution of the ESG ratings industry can be traced through several distinct phases, as highlighted by the "Rate the Raters" series:
- 2010–2018: The Era of Emergence. ESG ratings were niche products used by a small group of socially responsible investment (SRI) funds. Methodology was often opaque, and data was sparse.
- 2019–2022: The Era of Integration. ESG became mainstream. Ratings providers like Sustainalytics and MSCI saw explosive growth as traditional asset managers sought to integrate ESG into every fund. Ratings were often taken at face value.
- 2023–2024: The Era of Scrutiny. Regulators began to look at the ratings providers themselves. The UK, EU, and India introduced or proposed codes of conduct for ESG raters to address conflicts of interest and lack of transparency.
- 2025–2026: The Era of Internalization. As shown in the current report, the "sophistication gap" has closed. Investors now have the expertise to conduct their own research, using ratings as a raw material rather than a finished product.
Analysis of Implications for Corporations
The shift toward in-house research and direct engagement has profound implications for publicly traded companies. It is no longer sufficient for a company to simply manage its "score" with a few major ratings agencies. Because investors are conducting their own research, companies must be prepared for more rigorous and technical inquiries during engagement sessions.
Furthermore, the rise of corporate sustainability reports as a top-three information source means that the quality of a company’s own reporting is more important than ever. Investors are looking for data that is audit-ready and clearly linked to the company’s long-term financial strategy. Companies that fail to provide transparent, granular data may find themselves penalized by investors’ internal models, regardless of what their external ESG rating might suggest.
Aiste Brackley, Director of the ERM Sustainability Institute, noted that this trend reflects a "growing sophistication" in the market. "ESG data is becoming increasingly embedded in mainstream investment processes, including research, portfolio construction, risk management, and benchmarking," Brackley stated. This embedding means that ESG is moving out of the "sustainability department" and into the core of financial analysis.
Conclusion: A Maturing Market
The findings of the ERM "Rate the Raters 2026" report signal a maturing market where the initial hype surrounding ESG ratings is being replaced by a more disciplined, analytical approach. The decline in trust in third-party raters is not necessarily a sign of ESG’s failure, but rather an indication that the investment community is demanding higher standards of evidence and more direct accountability.
As the industry moves forward, the pressure will be on ratings providers to open their "black boxes" and provide more transparent, materiality-focused insights. Simultaneously, corporations must step up their disclosure efforts to meet the demands of an investor base that is increasingly doing its own homework. In this new landscape, the value of ESG information remains high, but the power has shifted from the raters to the researchers.
