As investors around the world seek to invest their money in companies that meet certain environmental, social and governance standards, Indian analysts are preparing benchmarks to measure compliance.
Several rating systems have been put in place to judge whether some of the country’s largest companies are committed to avoiding a climate catastrophe, have socially responsible practices and criteria for good governance. However, a common ground for evaluation remains to be found.
The increase in the number of data providers for such ratings stems from the fact that corporate financing is increasingly tied to explicit ESG objectives. More than $ 40 trillion has been injected globally in ESG-focused investments, according to ESG Risk Assessments & Insights Ltd. In India, 7% of assets under management are ESG investments. This figure is expected to rise to 30% by 2030.
“Basically, ESG investing is a recognition that companies do not operate in a vacuum. Companies should be evaluated for sustainable, responsible and ethical practices, as well as their financial performance, ”said Amish Mehta, President and COO, Crisil Ltd. “Investors are paying increasing attention to this and ESG has become imperative. A company with a higher ESG score is expected to manage risk and better capitalize on opportunities. “
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 LP and Thomson Reuters, dozens of companies already publish ESG scores . Enough for at least one company to publish a “Evaluate the reviewers” Annual Report. Such ratings are also accelerating in India, with at least three new markers appearing in the past four months.
Yet interpreting scores can be a difficult one with a myriad of variables and data points used. And the approach will change depending on who you ask.
Rush for ESG ratings
Take the dashboard of Edelweiss Financial Services Ltd. of the top 100 listed companies, mainly for institutional investors, was launched in May. They track 40 metrics with weights equal to E, S and G. These were pre-screened based on the availability of data in the public domain, said Alok Deshpande, executive director of institutional stocks, Edelweiss Securities. If a business does not disclose any of these metrics, it is penalized to some extent in its score.
“At the end of the day, ESG 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.” said Deshpande. “It adds stability. The number of shocks to your business will decrease. That’s the way to look at it.”
But Crisil, who released his own dashboard for 225 companies in June, is taking a different path. It tracks 100 parameters and has a different weighting for E, S, and G depending on the performance of the business and the relative performance of the industry to which it belongs. “The framework ensures that we can compare various 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 the indicators are looked at in context,” said President Sankar Chakraborti. “In a bank, for example, child labor would not be a critical factor. We manually identified factors like these for 200 sectors and gave a materiality score. Thus, child labor will have low materiality for banks but it could be higher for mining companies. “