Understanding the Applicability of ESG Ratings - CSR

Environmental, Social and Governance (ESG) factors have moved from being a secondary concern to becoming a central theme in global business and finance. Businesses with poor ESG scores have faced higher borrowing costs, exclusion from global supply chains and reduced investor interest, while those with strong ratings enjoy easier access to capital and stronger reputational advantage.

Companies are increasingly evaluated on how responsibly they manage environmental impact, social responsibilities and governance practices along with their financial performance. With rising investor awareness, stronger regulatory frameworks and a global demand for responsible investments, ESG ratings are now viewed as essential for guiding capital allocation, mitigating long-term risks and ensuring businesses remain sustainable in a rapidly changing world.

ESG ratings assess how effectively a company manages both financial and non-financial risks. While traditional credit ratings focus mainly on financial indicators such as debt levels, profitability and repayment capacity. ESG ratings extend the scope by also evaluating how a company addresses environmental impact, social responsibility, and governance practices. By integrating these factors into the overall credit profile, they reveal how sustainable practices or their absence can impact a company’s ability to meet financial obligations.

Benefits of ESG Rating:

• Better risk assessment, long-term value creation and alignment with responsible investment mandates.
• Helps companies compare themselves with others in the industry and keep improving.
• Provides transparency on non-financial performance, improving decision-making.
• Saves money by using energy and resources better.
• Supports new products like green loans and bonds.
• Access to capital, improved reputation and compliance with international standards.
• ESG scores help integrate sustainability into credit risk evaluation and loan pricing.
• Encourages responsible corporate conduct and alignment with UN SDGs.

ESG Rating Providers (ERPs):

ESG ratings are issued by specialized agencies often called ESG rating providers (ERPs).  They assess how companies manage ESG factors alongside financial risks. They use structured frameworks and data analysis to assign scores or ratings indicating overall sustainability performance. Each ERP develops its own in-house methodology, resulting in variations in scoring and weightage across providers. This makes direct comparison of ESG scores between companies difficult and highlights the need for harmonization and transparency in methodologies. These ratings guide investors, lenders, and regulators in making informed decisions on capital allocation, lending, and compliance oversight.

• Global providers: The most referred to agencies include: MSCI, Sustainalytics (Morningstar), S&P Global, Moody’s, Fitch Ratings.
• India: SEBI regulates ESG Rating Providers (ERPs) to ensure transparency and credibility. CRISIL, India’s leading credit rating agency became the first SEBI-approved ERP in 2024.

Legal Applicability in India:

ESG ratings themselves are not legally mandatory in India as of 2025. SEBI regulates ERPs to maintain credibility, but companies are not required by law to obtain a rating. Mandatory ESG disclosures are through:

• Business Responsibility Reporting (BRR) (2012) – initially for top 100 listed companies.
• Business Responsibility and Sustainability Report (BRSR) (2021) – compulsory for the top 1,000 listed companies by market capitalization.

These disclosures provide the data foundation that rating agencies can use to evaluate ESG risks and integrate them into ESG credit ratings.

Why ESG Ratings Are Practically Essential:

Even without a legal mandate, ESG ratings are increasingly important for:

• Global Supply Chains: Compliance with EU CSRD, EU Taxonomy, and CBAM for exports to EU, UK, US.
• Multinational Requirements: Subsidiaries aligning with parent company ESG standards.
• Access to Global Capital: International investors prefer companies with credible ESG ratings.
• Domestic Lending: RBI’s climate-risk framework links lending decisions to ESG performance.
• Reputation & Benchmarking: Leading Indian corporates like Infosys, TCS, Reliance, and Tata Steel use ESG ratings to build investor confidence.

In India, growing regulatory frameworks, investor expectations, and global business demands are making ESG ratings increasingly relevant for companies and lenders alike.

The article is written by Ms. Suhani Thepadiya – suhanimaheshwari@mmjc.in