Comparative assessment of ESG rating frameworks

Abstract

Sustainability has become a major theme at every major platform. The COP26, the commitment of major world economies to become carbon neutral and reduce emission, and the push for EVs and solar panels make it clearly abundant that a tectonic shift in the way we see sustainable practices. Earlier, concern for environmental and social causes was at the bottom of corporates' list of concerns as long as they did not affect their businesses. Most of the improvement steps were taken as a part of regulatory requirements or due to the founders' vision. According to Milton Friedman's theory, the first and foremost purpose of the firm is to increase the wealth of its shareholders. Hence, every step taken by the management is carefully designed to improve their market power and share. But today, It has become very important for firms to appear environmentally conscious and equalitarian firm to woo modern customers as well as employees and other stakeholders. Surely, these practices have left the altruistic domain and have started serving the economic purpose as well. Environment, Social, and Governance factors assume vital roles in determining the economic risks to the firms. With the devastation of the environment and injustices in the social spheres bringing the planet to a dangerous level, a better environmental, social, and governance (ESG) rating system is needed to get the positive impact investors are looking for and investing in these companies. In fact, ESG indices and investing have become the market's hottest trend. Many credit rating companies and market research are providing ESG ratings and indices. Financial Institutes, Institutional investors, asset managers, and other stakeholders are relying on these ratings to assess the company’s ESG performance and peer comparison. These reports form the basis of informal and ESG related proposals made by shareholders and investors. But, there is great variation among these reports, ratings, and their methodology, scope, and coverage. Many credit rating agencies are encouraging inputs from the targeted companies engaging them to improve data quality and transparency. (Betty M. Huber, 2017) While there is a lot of consensus in the financial credit ratings of the firms among the top rating agencies, there is a huge divergence in the ESG ratings of the same companies. Hence, the purpose of the report is to do a comparative analysis of the frameworks used by different rating agencies to determine the reason for these differences. The domain is in the context of India and limited to analysis of differences.