The ESG rating providers now have a big task at hand; here's what is going on

A company with investments in fossil fuels like coal and petroleum would certainly score low on ESG (environmental, social, and governance) parameters of any global rating provider. But an Indian ESG rating provider (ERP) may consider other factors at play, like the primacy of such fuels in a developing country. 

Take coal as an example. It looks set to remain the primary source of energy for the next few years considering India’s developmental needs. That may not be a valid consideration for a foreign ERP, but an Indian one is expected to take this into account.

Such considerations seem to have been the trigger behind the Securities and Exchange Board of India’s (Sebi) decision in July 2023 to formulate a regulatory framework for ERPs. Recently, Sebi accorded ERP certification to players such as CareEdge, Stakeholders Empowerment Services (SES), ICRA, CRISIL, and a few more, including global ones. India is the first country to have such a regulatory framework for ERPs.  

This follows other regulatory moves by Sebi to push companies to make sustainability a central tenet in their functioning. Earlier, Sebi had made it mandatory for the top 1,000 listed companies to make ESG disclosures in FY24. Starting FY25, the top 150 listed entities have to undertake reasonable third-party assurance as part of the Business Responsibility and Sustainability Report (BRSR) Core framework. 

Rohit Inamdar, CEO of rating agency CareEdge ESG, explains that there are multiple rating regimes internationally drawn from global ESG disclosure standards such as the Global Reporting Initiative (GRI), Task Force on Climate-Related Financial Disclosures (TCFD), and Sustainability Accounting Standards Board (SASB), which are being followed by ERPs such as S&P Global, Sustainalytics, MSCI, and Moody’s, among others.  

“BRSR/BRSR Core by Sebi kept in mind the kind of data collected by Indian corporations. Global rating models will be comprehensive and will pick key indicators from all jurisdictions, and our focus will be on Indian-specific parameters,” Inamdar tells BT.

Explaining the need for a customised ERP model, Sankar Chakraborti, Chairman of ESGRisk.ai, a subsidiary of Acuité Ratings & Research Ltd, says, “Take, for example, the use of coal in India, which is a big concern (among global players). Now, you cannot have a situation where everybody will stop using coal, so that is an aspect that rating agencies will have to consider in terms of building their tools and models.”

According to ERPs, the Sebi regulations are very comprehensive and transparent and, to some extent, address the divergence in ratings seen in global ERPs.  

“Sebi has brought uniformity across rating scales by making it mandatory for all ERPs to do ratings on a scale of 0-100 (not the case globally). I will also have to disclose the scores of the constituent pillars of E, S, and G and provide weighting to each of them,” says Inamdar, who has been in the rating business for over two decades. “Within ESG, we will have to disclose themes and the relative importance of these themes in scoring, key rating drivers, and key rating sensitivity.” 

Globally, concerns have been raised about the transparency of ERPs. How are Indian ERP players dealing with it?  
J. N. Gupta, Founder and Managing Director of SES, says his company only uses public data obtained through BRSR disclosures, annual reports, company websites, and stock filings. “We have a tool that assesses the data and generates reports. You can upload graphs, tables, everything...” Gupta tells BT. He adds that SES pioneered ESG ratings back in 2018-19, and the first report was published in 2019 based on FY18 data.

The coverage has now increased to over 500 companies and will increase gradually based on client requirements. 
SES has partnered with NSE to supply ESG ratings data to the bourse for its indices, besides covering various other domestic and FII clients since 2019.

Indian ESG rating players are also keeping an eye on global ERP regulations, especially European ones, to see if Sebi’s regulations require further tweaks.  

@richajourno