Introduction

In recent years, Environmental, Social and Governance (ESG) factors have gained significant traction globally, including in India. Investors, regulators and companies are increasingly recognizing the importance of ESG metrics in assessing the sustainability and ethical impact of investments. ESG ratings, which evaluate a company's performance on these three critical dimensions, have become a vital tool for decision-making. In India, where rapid economic growth is often accompanied by environmental degradation and social challenges, understanding ESG ratings becomes even more crucial.

What are ESG Ratings?

ESG ratings assess a company's environmental impact, social responsibility and governance practices. These ratings help investors determine the sustainability risk of their investments. A high ESG rating implies strong adherence to sustainability principles, while a lower rating indicates potential ESG risks.

Key Components of ESG Ratings

1. Environmental (E): GHG emissions, energy efficiency, toxic emissions & waste management and water management

2. Social (S): Employee wellbeing, community engagement, diversity and inclusion, human rights policies and consumer & product safety

3. Governance (G): Board structure, executive compensation, business ethics and transparency in financial disclosures.

ESG Ratings in India: Regulatory Framework

SEBI’s Role and Regulations

In July 2023, SEBI issued a Master Circular regulating ESG Rating Providers (ERPs) under the Credit Rating Agencies Regulations, 1999. This framework ensures that ERPs maintain transparency, credibility, and standardization in ESG assessments. Key highlights include:

i.  Mandatory Registration: All ERPs must be registered with SEBI.

ii.  Standardized Rating Products: SEBI mandates ERPs to offer at least six ESG rating products, including the ESG Rating, Transition (Parivartan) Score and Core ESG Rating.

iii.  Rating Scale: ESG ratings must follow a standardized scale of 0-100 to enhance comparability.

iv.  Disclosure Requirements: ERPs must publish ESG rating rationales, methodologies and transition rates annually.

Business Responsibility and Sustainability Report (BRSR)

SEBI has also introduced BRSR Core, a standardized framework requiring listed companies to disclose ESG-related data. The BRSR report strengthens ESG data quality, ensuring that ratings are based on verified information.

How ESG Ratings Are Calculated? 

ESG ratings are derived from a systematic assessment of a company’s disclosures and policies:

1) Data Collection: Information is gathered from publicly available documents such as Annual Reports, CSR Reports, Business Responsibility and Sustainability Reports (BRSR), and        third-party sustainability indices.

2) Analysis and Scoring: Companies are evaluated based on predefined criteria for environmental, social, and governance factors, with industry-specific weightages.

3) Aggregation: Individual scores for E, S, and G factors are combined to derive an overall ESG rating, reflecting the company’s holistic sustainability performance.

Users of ESG Ratings

i. Investors: ESG ratings help investors make informed decisions and evaluate the long-term sustainability of their portfolios.

ii. Financial Institutions: Banks and other financial entities assess ESG ratings to gauge a company's risk profile before granting loans or financial services.

iii. Regulators: Government agencies and regulatory bodies utilize ESG ratings to oversee corporate behaviour and enforce environmental, social, and governance (ESG) regulations.

iv. Companies: Businesses leverage ESG ratings to benchmark their performance against industry peers, identify improvement areas, and showcase sustainability initiatives to stakeholders.

v. Non-Governmental Organizations (NGOs): Advocacy groups and NGOs use ESG ratings to hold companies accountable for their environmental and social impact while promoting better corporate practices.

vi. Consumers: Growing awareness has led consumers to consider ESG ratings when making purchasing decisions, favouring companies with strong ESG performance.

vii. Analysts and Researchers: Financial analysts and researchers rely on ESG ratings to provide insights and recommendations for investors and other stakeholders.

Why ESG Ratings Matter

India, as one of the fastest-growing economies, is increasingly recognizing the importance of ESG practices. The country's commitment to achieving net-zero emissions by 2070 and its focus on sustainable development goals (SDGs) have amplified the relevance of ESG ratings. Here’s why ESG ratings are gaining traction in India:

1.  Investor Demand for Sustainable Investments

Globally, there is a growing appetite for sustainable investment options. According to a Morgan Stanley report, 77% of global individual investors are interested in companies or funds that deliver both financial returns and positive social or environmental impact. In India, this trend is reflected in the rise of ESG-focused mutual funds and the increasing allocation of capital to companies with strong ESG performance.

2. Regulatory Push

The Securities and Exchange Board of India (SEBI) has mandated the Business Responsibility and Sustainability Reporting (BRSR) framework for the top 1,000 listed companies. This move aligns with global ESG reporting standards and encourages companies to adopt sustainable practices. ESG ratings help companies comply with these regulations and demonstrate their commitment to sustainability.

3. Corporate Reputation and Stakeholder Expectations

Companies with strong ESG performance tend to enjoy enhanced brand loyalty and consumer trust. A Nielsen survey found that 46% of global consumers prefer brands that demonstrate a commitment to social and environmental issues. In India, where consumer awareness is rising, ESG ratings can serve as a differentiator in competitive markets.

4. Financial Performance

A Kroll study analysing data from over 13,000 global companies found that firms with higher ESG ratings delivered 50% higher returns compared to their lower-rated peers. The study covered regions including India, North America Western Europe and Asia.

Key Steps to Obtain an ESG Rating

1. Choose an ESG Framework

- Select a framework aligned with your industry and region (e.g., GRI, SASB, BRSR).

- Ensure the framework covers all relevant ESG dimensions for your business.

- Adapt the framework to meet both regulatory and stakeholder expectations.

2. Form an ESG Team

- Create a cross-functional team involving sustainability, finance, and HR.

- Assign roles for data collection, analysis and reporting.

- Provide training to team members on ESG standards and frameworks.

3. Gather Data

- Collect detailed metrics for environmental aspects (e.g., carbon footprint, energy use).

- Include social data such as workforce diversity, labor practices, and community impact.

- Record governance metrics like board diversity, ethics policies and compliance audits.

4.  Engage with an ESG Rating Agency

- Identify and approach reputed ESG rating agencies.

- Submit the collected data as per the agency’s requirements.

- Review feedback from the agency and implement recommended improvements.

Why Choose GlobeTrend Climate Impact Pvt Ltd as an ESG Rating Provider

1. Comprehensive ESG Assessment with Robust Metrics and KPIs

GlobeTrend offers a comprehensive ESG assessment, evaluating 330+ data points across Environmental, Social, and Governance pillars, using 130+ Key Performance Indicators (KPIs) to provide companies with a detailed, measurable framework for benchmarking sustainability practices against industry standards.

2. Actionable Insights and Recommendations

Clients receive an 80+ page detailed report featuring an SWOT analysis, along with specific, actionable recommendations. These insights are designed to help companies enhance their ESG scores and align better with sustainability goals.

3. India-Specific Methodology

GlobeTrend’s methodology is tailored to the Indian market, incorporating Environmental, Social and Governance indicators relevant to Indian laws and regulations, such as the Business Responsibility & Sustainability Reporting (BRSR) framework and the Indian Companies Act 2013. This ensures alignment with local compliance and sustainability benchmarks.

Conclusion

ESG ratings are transforming India’s corporate landscape, influencing investment patterns and regulatory frameworks. Companies prioritizing transparency, sustainability and strong governance are better positioned for long-term success, investor confidence and competitive advantage. With ESG integration becoming a business imperative, Indian firms must proactively adopt responsible business practices to thrive in an evolving global economy.

References:

1. https://www.diligent.com/resources/blog/esg-risk-scores

2. https://www.sganalytics.com/blog/guide-to-understanding-esg-ratings/

3. https://lrn.com/blog/top-10-takeaways-from-the-2023-edelman-trust-barometer

4. https://www.climate-change.in/about-us.php

5. https://www.sebi.gov.in/legal/master-circulars/jul-2023/master-circular-for-esg-rating-providers-erps-_73856.html