Looking For The Best ESG Rating Method? Good Luck With That.

As investors across the globe look to put their money in companies that fulfill certain environmental, social and governance standards, analysts in India are preparing benchmarks to measure compliance.

Several scoring systems have come up to judge whether some of the nation’s biggest companies are committed to averting a climate catastrophe, have socially responsible practices and good governance benchmarks. A common ground for assessment, though, is yet to be found.

The spurt in data providers for such ratings stems from the fact that funding for companies is being increasingly tied to explicit ESG goals. Over $40 trillion has been pumped in globally in ESG-focused investments, according to ESG Risk Assessments & Insights Ltd. In India, 7% of the assets under management are ESG investments. That number’s likely to rise to 30% by 2030.

“At the core, ESG-based investing is a recognition of the fact that companies do not function in a vacuum. Businesses need to be evaluated through the lens of sustainable, responsible and ethical practices in the same way as its financial performance,” said Amish Mehta, president and chief operating officer, Crisil Ltd. “Investors are paying increasing attention to this and ESG has become imperative. A company that scores higher on ESG is expected to manage risks and capitalise on opportunities better.”

International rating agencies such as Standard & Poor’s, Fitch Ratings and Moody’s Investors Services, index providers like MSCI Inc., financial data providers like Bloomberg L.P. and Thomson Reuters—dozens of companies are already putting out ESG scores. Enough for at least one firm to publish a ‘Rate The Raters’ report annually. Such ratings are gathering pace in India too, with at least three new scorers emerging in the last four months.

Still, interpreting scores can be a tough ask with a myriad of variables and data points being used. And the approach will change based on who you ask.

ESG Ratings Rush

Take Edelweiss Financial Services Ltd.’s scorecard of the top 100 listed companies, primarily for institutional investors, was launched in May. They track 40 metrics with equal weights to the E, S and G. These have been shortlisted based on the availability of data in the public domain, said Alok Deshpande, executive director of institutional equities, Edelweiss Securities. If a company is not disclosing any of those metrics, they get penalised to an extent in their score.

“ESG, at the end of the day, is a proxy for the sustainability quotient of the business. When you look at ESG scores, you are trying to quantify the quality of sustainability.” Deshpande said. “It adds stability. The number of shocks for your business will go down. That’s the way to look at it.”

But Crisil, which came out with its own scorecard in June for 225 companies, takes another route. It tracks 100 parameters and has different weightage for E, S and G based on company performance and the relative performance of the sector it belongs to. “The framework ensures we can compare diverse sectors such as mining and technology on a single scale,” Mehta said.

Then there are more complex models like the one deployed by ESG Risk AI, founded by Acuite Ratings. “We have built a detailed taxonomy with 525 indicators. But we have to make sure that all indicators are looked at within a context,” said Chairman Sankar Chakraborti. “In a bank, for instance, child labour would not be a critical factor. We have manually identified factors like these for 200 sectors and given a materiality score. So, child labour will have low materiality for banks but it could be higher for mining companies.”

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