Why Indian ESG ratings can be confusing

The SEBI (Securities and Exchange Board of India) has issued certification to environmental, social and governance (ESG) rating providers (ERPs) in India but what can turn out to be confusing for an investor is possibility of varied rating scores provided by different rating agencies.

The SEBI in July 2023 issued a circular to suitably incorporate the ESG aspects that are contextual to the Indian market. An indicative list of India-specific ESG parameters was also issued.

Based on these parameters, several rating agencies have received SEBI certifications as ERP. Rating agencies such as CareEdge, SES, ICRA, Crisil and Acuite among others have so far received the certification.   

What can turn out to be somewhat confusing for investors making an investment decision based on ESG ratings is possibility of varied ratings score by different ERPs.

While the SEBI has laid out a very detailed rating structure with a unified rating scale of 0-100 for assessment, separate weightages under E, S and G and average weighted score to streamline the process, it is for ERPs to pick score for each theme.

Rohit Inamdar, CEO of rating agency CareEdge ESG, explains the reason behind varied ratings.

“It is possible that different rating agencies will have different rating scores as their models will be different. What is a key theme for me as a rating agency, for some other rating agency it may not give that much importance to that theme and some other theme may get a higher score?” Inamdar tells Business Today.  

What does it mean? One rating agency may give a high score to say water conservation but a lesser score to gender pay parity while it may be reverse for other rating provider. So, the models will run as per scores assigned under each theme by ESG rating provider.

However, Inamdar says there can be some uniformity as market matures. “The good part is that everything has to be disclosed by rating agency.”

The SEBI’s master circular issues in 2023 ensures stringent monitoring mechanisms. ERPs are required to undergo a yearly internal audit to ensure adherence to the provisions.