On a sunny April morning 93 years ago, Mohandas Karamchand Gandhi marched to the Dandi beach in Gujarat, picked up a lump of muddy salt, and said, “With this, I am shaking the foundations of the British Empire.” And the ‘common salt’ did go on to shake the largest colonial project in human history. Short of a century later, Indian businesses are struggling under the yoke of western agencies that rate companies on environmental, social and governance (ESG) parameters.
India, today, is the fastest-growing major economy in the world. And much of this growth is powered by coal. India’s reliance on coal is inevitable if the country wants to keep growing at a rate of 7–8 per cent this decade. This journey faces a serious risk if western agencies continue to dominate the ESG-rating process.
Several Indian companies such as the Adani Group, Tata and Reliance have suffered on account of ESG ratings given by agencies in the West as global sources of funding increasingly rely on these ratings to make investments.
The monitoring of ESG targets by Western agencies presents several risks, says Shravan Shetty, managing director at Primus Partners, a New Delhi-based consulting company. “The [western] agencies apply ESG criteria rooted in standards and expectations of developed economies, potentially overlooking India’s developmental context.”
The West’s Monopoly of ESG
What allows these western ratings agencies to drive down the ratings of Indian companies is the lack of a fixed framework. When the United Nations (UN), in 2006, provided a framework to incorporate ESG factors into investment decision-making, the international agency did not define the norms.
The task of defining ESG norms fell to western initiatives such as the Netherlands-headquartered Global Reporting Initiative (GRI) and the Germany-headquartered International Sustainability Standards Board (ISSB).
Soon, ESG ratings firms mushroomed across Europe and the United States. Agencies such as FTSE Russell, based out of London, the New York-based MSCI and the Netherlands-based Sustainalytics started getting a disproportionate say in ESG matters across the globe, thereby gaining control over global investment flows.
By 2021, Europe’s share in the allocation of the sustainable fund portfolio was at $458 billion, making up for over a quarter of global sustainable fund investments, as per a report by the UN Conference on Trade and Development. North America’s share was pegged at $303 billion, roughly 17 per cent of the investments.
Emerging economies such as India had just 3 per cent of the share, $54 billion.
The right to certify has given these think tanks and consultancies in North America and western Europe a certain power over the rest of the world, says Sanjeev Sanyal, economic advisor to the Prime Minister of India.
He says western agencies have captured the ratings space without any consultation with the Global South, or indeed the rest of the Global North. “First, they are deciding the rules of the game and then they are also doing the refereeing. This is a form of neocolonial control,” Sanyal adds.
Nearly 80 per cent of Indian firms have ESG ratings of just ‘adequate’ or ‘below average’, according to research by CRISIL, an India-based global analytics firm. And poor ratings by agencies in North America and Europe put India at a great disadvantage in attracting foreign funds.
“Persistent low ratings can reinforce [the] negative impression of India’s investment climate, turning away possible capital and impending economic expansion,” says Jaishree Banerjee, senior manager, growth advisory at Aranca, a Mumbai-based global research and analytics firm.
Banerjee says it is best that India develops a robust ESG-rating system that is in line with its ambition to achieve net-zero emissions by 2070 and a 45 per cent reduction in carbon emissions by 2030.
India was a late entrant to the ESG paradigm. ESG principles started gaining traction in India only after 2010, driven by increasing investor demand for sustainable investments. The Securities and Exchange Board of India (SEBI), the national regulatory body for securities and commodity market, introduced mandatory ESG reporting guidelines only in 2021. Indian businesses have started integrating ESG into their broader strategies, but the transition will take time.
Meanwhile, western ESG ratings are claiming a larger share of the ratings market every day. The market size of the ESG-ratings business, which is estimated at $10.37 billion in 2024, is expected to grow to $15.42 billion by 2029, growing at a compound annual growth rate (CAGR) of 8.25 per cent during the period.
Why it’s Difficult for India to Trust the West
ESG anyway is a complex matter. Ratings and scores need to rely on qualitative inputs instead of being completely reliant on quantitative data. Factors such as ‘social’ and ‘governance’ are subjective, often located in geopolitical sensitivities. Add to that, it is difficult for India to trust western agencies with regard to rating due to the manner in which such agencies have rated India’s sovereign credit.
Western agencies have consistently given India poor credit ratings while offering no explanation. For example, India has been given the lowest possible credit ratings by global agencies such as S&P, Fitch and Moody’s.
Fitch has rated India ‘BBB’ since 2006. A ‘BBB’ rating indicates that while expectations of default risk are low and the capacity for payment of financial commitments adequate, adverse business or economic conditions are more likely to impair this capacity.
S&P too has rated India ‘BBB’ since 2007, indicating adequate capacity to meet financial commitments, but more subject to adverse economic conditions. Moody’s has rated India ‘Baa3’, the lowest possible investment grade, since 2004. These ratings have often impacted the flow of foreign direct investment (FDI) to India.
These agencies seem to have taken no account of India’s growth momentum and improving fiscal profile, and have put India at the bottom tier of their charts. This, even while India’s growth rate has consistently surpassed competing economies by a wide margin.
India has projected its fiscal deficit at 5.8 per cent in 2023–24, down from 9.2 per cent in 2020–21. For 2024–25, the Indian government has pegged the fiscal deficit at an impressive 5.1 per cent, with an average growth rate for the first three quarters of 2023–24 recorded at 8.2 per cent.
“Ratings agencies say what they say, we live with that. I do not expect anything from the rating agencies. They will do what they do, we will do what we must do. It does not seem to matter to them whether we are fiscally profligate or not,” says T.V. Somanathan, finance secretary and secretary of expenditure at the Union Ministry of Finance, Government of India.
India’s fiscal discipline has not been taken into account by global agencies, according to Dhiraj Nim, economist at ANZ Banking Group, an Australia-based bank. “Indeed, there is good reason for India to question the methodology of these credit rating agencies because it has taken several fiscally conservative steps in the recent past, evident from both macro and fiscal lens,” he says.
India gets poor ratings despite the fact that credit ratings involve assessing whether the instrument or issuer defaults or not, a primarily quantitative test. ESG ratings, on the other hand, have a broader spectrum and no uniform methodology, thus making Indian companies distrust western ratings.
The Vagueness of ESG Ratings
There is a clear incongruity in the way the western ESG ratings agencies rate companies. Among the top 53 companies based on ESG on the S&P BSE index, one-third have a Sustainalytics ESG rating above 30, and five of them over 40. A rating between 30 and 40 means “high risk”, while those exceeding 40 are categorised as “severe risk”.
Consider the example of power utility company NTPC. Despite getting an ‘adequate’ ESG rating from India-based CRISIL, Sustainalytics has called the company “high risk” while MSCI has given it a ‘CCC’ grade, its lowest ESG rating. The ratings don’t seem to have taken into account that NTPC has made clean power generation a pivotal priority, aiming to generate 45 per cent of its power from renewable sources.
Tata Power, the Tata Group-owned electricity generation company, scored 67 out of 100—significantly higher than the global average of 38—in S&P’s corporate sustainability assessment results. CRISIL gave it a ‘strong grade’. Yet MSCI chose to put the company in the ‘average’ category and Sustainalytics flagged it as “high risk”.
According to Ramnath Vaidyanathan, who heads environmental sustainability at Godrej Industries, disparate ratings can be quite frustrating for companies looking for a definitive direction in their ESG strategy. “It is possible to receive an exceptional rating on one disclosure but an average on another. This is because the weightages assigned to metrics are different for different indices,” he says.
He feels supply chains in Asia are complex and consist of several traders and small holders, which makes data accuracy and traceability a challenge. “Another example is emissions factors in developing nations, which are overestimated due to lack of availability of localised data sets.”
The Need for Swadeshi ESG Ratings
India has already woken up to the need for its own ratings mechanism in the credit ratings system. At the government’s nudge, CareEdge, an Indian ratings company, is coming up with a methodology for credit ratings. The process is underway and soon India will have its own credit ratings, says Sanyal. But the domain of ESG ratings remains to be explored.
India, right now, faces numerous challenges in establishing its own ESG-rating agencies capable of competing at the global level. “Credibility for Indian agencies needs to be built over time and on a foundation of robust methodologies,” says Indra Guha, sustainability and ESG partner with BDO India, a consulting firm. “Another challenge is technological infrastructure and data availability, particularly for companies operating outside India, as well as data security.”
The lack of a universal methodology for ESG ratings has led to confusion among investors and issuers alike. Differences in methodology and varying levels of data transparency often hinder comparability of ESG ratings for developing countries like India and other countries in the Global South whose needs are different from those of the West.
Agencies in countries with high ESG portfolios have often ranked emerging economies poorly. For example, RobecoSAM, a Switzerland-based investment company, placed India at the 116th spot in its 2021 ESG chart of 150 countries. The top five spots were secured by European nations.
This has led to a call for an international dialogue on ESG certification and enforcement. In the current landscape, agencies may prioritise entities that align with their commercial or geopolitical interests, which is why it is essential to develop a more transparent and equitable framework for ESG ratings, according to Sandiip Bhammer, founder and managing partner of green venture capital fund Green Frontier Capital.
ESG ratings have often triggered complaints of being unfairly invested in geopolitics. Last year, Tesla CEO Elon Musk took to social media platform X to highlight that tobacco companies such as Philip Morris had higher ESG scores than his electric car manufacturing venture Tesla. Philip Morris had an ESG score of 84 out of 100 while Tesla scored 37, Musk had said.
Until now, India has remained on the sidelines of the ESG revolution that has unfolded in advanced economies and global investment strategies. It is imperative that the fastest growing economy take proactive steps and build an ESG rating system that is in line with its business environment.
A potential opening in this direction can be SEBI’s rule on rating providers. Last year, the regulator said ESG rating services could be provided only by agencies certified by it. Moreover, entities will have to disclose their rating methodology on their websites and include category-wise share of all three factors—E,S and G.
Now, it is time for Indian businesses to capitalise on the SEBI order and make a move against agencies that have been accused of being guided by a geopolitical agenda. “Since SEBI has come out with the need to register ESG rating service providers, giving expensive guidelines on transparency, many international ratings agencies have decided not to participate in the Indian market, leaving a strong opportunity for Indian companies,” says Aditi Balbir, co-founder, EcoRatings, an AI-powered platform for ESG ratings of products and services.
