As defined in the SEBI regulations, “Environment, Social and Governance Ratings” or “ESG Ratings” are rating products that reflect the opinion about an issuer or a security, regarding its ESG profile or characteristics or exposure to ESG risk, governance risk, social risk, climatic or environmental risks, or impact on society, climate and the environment, that are issued using a defined ranking system of rating categories, whether or not these are explicitly labelled as “ESG Ratings”.
ESG Impact Ratings
ESG Impact Ratings seek to measure the extent to which entities integrate, manage, and disclose the relevant sustainability factors in their activities and reflect the impact of an entity’s business activities on the environment and the society, in the context of its governance practices. ESG Impact Ratings could be assigned both to an entity or to the instruments issued by it.
ESG Transition Ratings/ Scores
ESG Transition Ratings/ Scores aim to measure the velocity of and investments made by an entity in making the transition to the Net Zero Goals or improving its ESG impact profile. These ratings/scores reflect the incremental changes that an entity has made in its transition journey over recent years or concrete plans/ targets it harbours to address the risks and opportunities involved in transitioning to more sustainable operations. ESG Transition Ratings/ Scores could be assigned both to an entity or to the instruments issued by it.
ESG Combined Ratings/ Scores
ESG Combined Ratings/ Scores, as the name suggests, combine the ESG Impact Rating and the ESG Transition Rating of an entity i.e., incorporate both the state as well as the progress made/ being made by an entity in its ESG transition journey. ESG Combined Ratings/ Scores could be assigned both to an entity or to the instruments issued by it.
Core ESG Impact Ratings
Core ESG Impact Rating is the ESG Impact Rating that is based only on third-party assured or audited data disclosed by the rated entity. For simplicity and consistency, the Core ESG Impact Rating is arrived at using the BRSR Core indicators.
Core ESG Transition Ratings/ Scores
Core ESG Transition Rating/ Score is an ESG Transition Rating/ Score that is based only on third-party assured or audited data disclosed by the rated entity. For simplicity and consistency, the Core ESG Transition Rating/ Score is designed using the BRSR Core indicators.
Core ESG Combined Ratings/ Scores
Core ESG Combined Rating/ Score is an ESG Combined Rating/ Score that is based only on third-party assured or audited data disclosed by the entity. For simplicity and consistency, the ESG Combined Rating/ Score is designed using the BRSR Core indicators.
ICRA ESG Ratings are assigned on a sector-agnostic basis to enable a comparison of ratings of entities not only within the same sector but also across sectors. It is acknowledged that this approach puts certain sectors at a natural disadvantage to others in terms of the rating outcome. But an approach like this, based on relative ranking in the broadest sense, would allow the rating users, in ICRA ESG’s view, to get a fuller perspective of the divergence between the ‘best’ and the ‘worst’ performers on the ESG metric. The ESG Impact Rating methodology considers 90+ qualitative and quantitative indicators related to an entity. This includes instances of adverse news or developments relating to the environment, social or governance aspects of an entity, besides instances of any fines or penalties imposed by the statutory authorities triggered by, say negligent environmental actions.
ICRA ESG’s in-house research and database ensures that the ratings are supported by objective benchmarks and peer comparisons. At the same time, these ratings are not merely mechanistic outputs derived from a model but do involve the collective judgement of rating committee members.
(a) ESG ratings are not recommendations to buy or sell or hold a specified rated security nor are they offered as guarantees or protections against default or other investment risks. They are mere opinions on the environmental, social and governance performance of a rated entity.
(b) ESG Impact Ratings do not reflect the extent of an entity’s resilience to ESG-related risks. An entity might be highly vulnerable to physical climate risks because of its business activities being concentrated in a flood-prone region, but it may still be assigned a high ESG Impact Rating if its own operations do not create negative externalities. In contrast, an entity might be highly resilient to business and financial vulnerabilities by virtue of, say, a strong parentage, but its ESG Impact Rating might be low if its operations materially harm the environment and/ or the society.
(c) ESG Transition Ratings/ Scores do not imply an assurance on a rated entity’s transition to net zero or mitigation of other ESG risks. The ratings/ scores merely represent an opinion on the pace of transition based on the available information. The actual transition will depend on the actual investments made by the entity and other market/ regulatory circumstances.
Investors
ESG ratings provide multiple benefits to investors including the ability to make more informed decisions based on an independent third-party’s assessment of an entity’s environmental, social, and governance practices. This helps the investors identify sustainable and responsible companies that align with their values and long-term goals. ESG ratings help the investors integrate non-financial factors into their investment strategies, promoting sustainable and responsible investment.
Rated entities
For the rated entities, having a favorable ESG rating can be advantageous in several ways. A high ESG rating can enhance an entity’s reputation and attract environmentally and socially conscious investors, potentially expanding the investor base. A strong ESG performance can also lead to improved access to capital, as responsible investment funds and institutions increasingly seek entities that align with their sustainability objectives. Furthermore, addressing ESG concerns can drive operational efficiencies and risk mitigation, fostering long-term resilience and value creation for the entity.
Intermediaries
Intermediaries, such as asset managers and financial institutions, benefit from ESG ratings by enhancing their service offerings. By providing comprehensive ESG analysis and insights, these intermediaries can assist investors in making well-informed decisions and building diversified portfolios that incorporate sustainability factors. Moreover, ESG ratings can help intermediaries develop customized investment strategies tailored to specific client preferences, driving greater client satisfaction and loyalty.
Regulators
For regulators, ESG ratings play a crucial role in promoting transparency and accountability in financial markets. These ratings can be used to monitor and assess the environmental and social impact of businesses, contributing to sustainable development goals. Regulators can also leverage ESG ratings to identify potential risks and vulnerabilities within the financial system, aiding in the formulation of targeted policies to address these concerns effectively.
Public at large
ESG ratings benefit the public by fostering greater corporate responsibility and sustainable practices. Entities with high ESG ratings tend to be more focused on environmental conservation, social welfare, and ethical governance. As consumers, the public can use ESG ratings to support businesses that align with their values and avoid those with poor sustainability records. Furthermore, increased ESG awareness can encourage entities to improve their practices, contributing to positive environmental and societal impacts.
