In an era where corporate responsibility and sustainability are no longer optional but essential, ‘environmental, social, and governance’ (ESG) ratings have emerged as the new benchmark for businesses worldwide. With the global push towards sustainable investing, ESG ratings are becoming a decisive factor in shaping the future of businesses, including those in India.
ESG ratings serve as a comprehensive assessment of a company’s commitment to sustainable practices. They encapsulate the company’s performance across environmental, social, and governance dimensions, offering a holistic view of its operations. The ratings not only reflect the company’s ethical standing but also gauge its long-term viability in a rapidly changing world.
For Indian companies, ESG ratings provide a critical tool to benchmark themselves against global standards. They offer a pathway to enhancing sustainability performance through transparency and accountability.
The SEBI factor
India’s regulatory landscape has begun to reflect the growing importance of ESG. The Securities and Exchange Board of India (SEBI) has taken significant steps to embed ESG principles in the fabric of corporate India. The introduction of the Business Responsibility and Sustainability Reporting (BRSR) framework for the top 1,000 listed entities is a landmark move that aims to standardise ESG disclosures across the board. It also signals that India is serious about its sustainability commitments.
But SEBI didn’t stop there. In July 2023, the markets regulator introduced guidelines for ESG rating providers, mandating them to assign ESG scores on a uniform 100-point scale. This is groundbreaking not just for the rigour but also the potential to bring consistency and comparability to ESG ratings in India.
Inherent challenges
While the global shift towards ESG is undeniable, the Indian context presents its own set of challenges. The socio-economic conditions in India differ significantly from those in developed economies, and a one-size-fits-all approach to ESG ratings simply won’t work.
The availability and quality of ESG data in India are still evolving, and these can impact the accuracy and reliability of the ratings.
Investment magnet
For companies, a strong ESG performance translates into more than just good public relations. It means enhanced brand reputation, reduced risk exposure, and added attraction to both equity and debt investors. In a market where investors are increasingly looking for companies that can manage ESG-related risks, a robust ESG rating can be a powerful differentiator.
Companies can diversify their investor base and raise capital more efficiently. This is particularly crucial in India, where access to capital remains a significant challenge for many businesses.
Risk assessment
A focus on evaluation-oriented, objective assessment of sustainability risks is essential to fostering positive transformation and building stakeholder trust. Globally, there is a push towards more regulated and transparent ESG ratings, which are crucial for building investor confidence and ensuring consistency among rated companies.
India stands at a crossroads. On “the” one hand, the country faces significant socio-economic challenges that complicate the adoption of ESG practices, but on the other, there is an enormous opportunity to lead the way in sustainable development, setting an example for other emerging markets. By adopting a localised approach to ESG assessments, Indian companies can better navigate the complexities of their operating environment while contributing to the global push for sustainability.
A strategic imperative
ESG ratings are not just a regulatory checkbox but also a strategic imperative. For India, embracing ESG is more than about aligning with global trends — it is about securing a sustainable and prosperous future. As ESG ratings continue to evolve, they will undoubtedly add significant value to the global economy by promoting responsible business practices and fostering long-term sustainability. The question is not whether India will join this movement — it already has. The real question is how quickly and effectively Indian businesses can leverage ESG to drive their growth and ensure their place in the global economy.
(The writer is Managing Director and Group CEO, CareEdge)